Moody’s changed its outlook on Amazon.com, Inc. (NASDAQ:AMZN) to negative as the company continues to add more debt without delivering profit performance. The ratings agency also appeared to do something that Amazon itself refuses to do: specify a timetable for the company’s profitability.
Amazon floating additional debt to make up for its profit deficiency
Investors in Amazon.com have been waiting patiently for the company to deliver profits after years of sales growth. Now, Amazon appears to be making up its profit deficiency by floating additional debt to cover its operating expenses rather than relying on business revenues, that pesky traditional method to operate a company.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
As a result of the new debt plan, Moody’s today downgraded its outlook to negative. “The change in outlook to negative results from Amazon.com, Inc. (NASDAQ:AMZN)’s announcement this morning that it was issuing a sizeable, though amount to be determined, level of new senior unsecured notes,” stated Moody’s Vice President Charlie O’Shea.
The issue of continuing to issue additional debt without any guidance towards when the online retailer might show a profit is a concern to more than Moody’s. “Proceeds are to be used for general corporate purposes in support of Amazon’s myriad growth initiatives, and it is Moody’s expectation that the funds will not be utilized for any form of shareholder returns,” O’Shea said, noting that shareholders are left holding the bag while Amazon continues to be held to a different standard without change in the foreseeable future. “While the new debt will further exacerbate Amazon.com, Inc. (NASDAQ:AMZN)’s already weak interest coverage due to, among other things, the lack of visibility surrounding the cadence for deployment of proceeds, potential areas of future growth and investment utilizing these proceeds, and the timing of potential positive returns, Moody’s believes that the company’s excellent liquidity provides sufficient cushion to affirm the Baa1 rating.”
Baa1 senior unsecured rating for Amazon
Moody’s Baa1 senior unsecured rating for Amazon.com, Inc. (NASDAQ:AMZN), a decidedly positive tone in a negative announcement, reflects positive liquidity and what is termed a “conservative financial policy relative to shareholder returns.” The discretionary rating towers over a weak overall quantitative credit profile “resulting from prodigious growth-oriented spending.”
The discretionary rating gives credit to Amazon’s dominant position as an online retailer. This comes despite what Moody’s believes increased competition from brick-and-mortar retailers as they transition successful businesses online. Amazon’s leading position in cloud-based storage and other services through Amazon Web Services were also cited for the positive Baa1 rating.
Interestingly, the rating call came with an expectation for profit timing, something Amazon.com, Inc. (NASDAQ:AMZN) has been loathsome to provide. “Moody’s expectation that this present investment cycle will begin to generate positive returns as measured by improved interest coverage during 2015,” is an apparent reference to a general high noon date for Amazon to turn profitable, at least in Moody’s eyes.