Should You Be Worried About Amazon's Recent $8 Billion Loan? – The Motley Fool - 1Home

Should You Be Worried About Amazon's Recent $8 Billion Loan? – The Motley Fool

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, […]



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It would be easy to look right past this news item without giving it a second thought. Indeed, Amazon (AMZN 3.56%) didn’t even issue a press release informing investors of the decision. It simply submitted the required SEC filing on the matter.
Nevertheless, the fact that the e-commerce giant is taking out an $8 billion short-term loan speaks volumes. Perhaps the company is feeling more financially pinched than it seems it should be. More than that though, this liquidity crunch may be an omen of a broader, sweeping economic headwind.
On the likely chance you didn’t hear, Amazon just borrowed $8 billion. The annualized interest rate on the loan in question is the Secured Overnight Financing Rate — around 4.3% right now — plus 0.75%. All told, the loan — earmarked for “general corporate purposes” — will cost the company about $400 million over the course of the coming year.
From one perspective, that’s seemingly no big deal. Amazon’s already got nearly $59 billion worth of long-term debt on its books and almost $35 billion worth of cash in the bank. It’s also expected to report sales in excess of $500 billion for the full year when it posts its fourth-quarter numbers in February. In the context of those numbers, the loan in question looks pretty minor.
But that’s why it’s such a curious and telling development: Why would a company that’s no stranger to working with much bigger numbers bother with such a relatively small loan now?
It’s only speculation of course, but perhaps this $8 billion loan is an indirect sign that Amazon is facing a near-term liquidity crisis.
That’s certainly not a stretch argument. While it continues to generate ridiculous amounts of revenue, Amazon is also losing money. Burdened by high shipping, inventory, and personnel costs, the company only produced $9.5 billion worth of net operating income through the first three quarters of 2022. That was well down from the $21.4 billion in operating profits Amazon collected during the first nine months of 2021. And on a GAAP basis, it’s actually in the red to the tune of $3 billion for the first three quarters of the last fiscal year. Free cash flow for the trailing four reported quarters is — and this isn’t a typo — negative $19.7 billion, compared to positive $2.6 billion for the previous 12-month stretch.
The kicker: CEO Andy Jassey just confirmed Amazon is aiming to cull 18,000 workers in the foreseeable future, up from his previous estimate of 10,000.
Take the hint. While borrowing money may not have been an outright necessity, Amazon’s cash situation clearly looks dire. This dynamic will make the stock a tough one to own until the economy’s on a firmer footing and the company’s costs are brought under tighter control.
But that’s only half of the big takeaway from Amazon’s loan news.
Were it just Amazon, it would be easy to chalk the matter up as a company-specific challenge. However, it’s not. The e-commerce giant is the proverbial canary in the coal mine. Other major tech names are embracing similar austerity measures.
Take Alphabet as an example. CEO Sundar Pichai has been imposing cost clampdowns since September. Microsoft has been doing it since August. Salesforce CEO Marc Benioff conceded earlier this week that his company had hired “too many people” before and even after the COVID-19 pandemic took hold, justifying his recent decision to lay off around 10% of the company’s employees.
While cost-cutting and mass layoffs aren’t unheard of, they are relatively unusual, only seen in the toughest of times. And they’re particularly unusual measures within the tech sector, which boasts some of the market’s most profitable companies while at the same time producing some of the global economy’s best profits.
If Microsoft, Alphabet, and Amazon are all making a point of curbing their costs (and stashing some cash in the coffers for even rainier days), it’s a telling signal about what they see on the horizon. Remember, corporations hire their own economists and analysts to predict what the future likely holds.
What the future may actually hold from here is still anyone’s guess. Amazon and its peers are clearly hunkering down for the worst, though, lending credence to the predictions that the United States — and presumably, the world — will quietly slip into a recession this year. According to The Wall Street Journal‘s most recent survey regarding the matter, 65% of economists believe the U.S. will suffer an economic recession in 2023. Those results jibe with a similar survey performed by Bloomberg. Even if we don’t see a technical recession take shape, however, the headwinds currently blowing don’t seem ready to ease anytime soon.
So, connect the dots: Amazon’s $8 billion loan it seemingly doesn’t need may well be a sign that it knows it will need liquidity in the near future. Investors should prepare and adjust their expectations accordingly.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Microsoft, and Salesforce. The Motley Fool has a disclosure policy.
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