Novice Investing - Amazing Buyback at Amazon

Date: Tuesday 13th 2008f May 2008 06:52:03 AM

Amazing Buyback at Amazon - 02/08/2008

By: Hari Wibowo

Amazon.com Inc. (AMZN) announced a $ 1 Billion share buyback, the retirement of its 4.75% $ 899 Million convertible notes and its. 6.875% 240 Million Euros notes outstanding. In early trading, investors cheer this decision and bid Amazon's price up 3.64% to $ 73.50 per share. In our opinion, there is a bad and good news with this decision.

First the good thing. Amazon.com has the dough to make this happen. As of 31st December 2007, it has $ 3.1 Billion in cash and its equivalents and growing. Lately, Amazon.com is earning about $ 1.00 per share (or $ 416 Million) annually and this figure is expected to continue rising for the next several years. Thus, a $ 1.3 Billion early retirement of debt and a $ 1 Billion of share buyback (which may not materialize soon) is affordable. I feel that the early debt retirement is a good move considering the trend of lower interest rate ahead. Considering the source of funding is from Amazon's operating cash flow, it is a prudent move, indeed.

Second, the bad one. Amazon.com's $ 1 Billion share buy back is ill-timed. With recent price of $ 73.50 per share and earning per share less than $ 2.00 per share for the next two years, Amazon is earning ($ 2.00/ $ 73.50) x 100% = 2.72% from this share buyback. Is that a good way of utilizing shareholder's money? Of course not. Amazon should rather keep its money in the government bonds or Certificate of Deposit and earn higher interest. In recent months, Amazon.com has made several acquisitions with the latest being Audible. I figure that management is trying hard to reinvest its money but it is not enough. Therefore, they resolve to buying its share at current lofty prices.

With the current debt repurchase, Amazon.com is expected to be having a positive net cash and a stronger company going into the 2008 recession. This is a far different pictures a decade ago when the company is growing furiously but rake in a lot of debt in the process. Now, all their investments seem to be paying off and it can pay off all those debts now. In fact, Amazon.com is now a much stronger company than its early competitors in the book field, Barnes & Noble Inc. (BKS). Barnes & Noble in recent month reported a positive net cash of 348.7 Million in its balance sheet as opposed to a positive net cash of $ 1.7 Billion for Amazon.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Amazon.com Inc. (AMZN) or any other securities.

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