The answer is 42 and its name is bond

It was interesting to see Amazon to raise $10B worth of bonds on June 2nd. It made me wonder what makes investors treat a trillion dollar company similar to a government giving them a three year yield of 0.4%.

The personality of the CEO should matter less than the management philosophy. Bezos made a remarkable job by growing Amazon in a very competitive market. He is a warrior and he outperformed the big publishing houses and book sellers. It is a way different market than the desert … or forest to consume in end user computing that Bill Gates and Steve Ballmer faced when moving Microsoft from New Mexico to Washington State. He also recognized the opportunity in online retail and datacenter renting. He is from the New York investment world, there is no surprise. One thing I learned from Tom Reilly on the other hand, the former CEO of Cloudera that I worked for, that the good CEOs make themselves redundant. They hire the right people and the better they do it, the less problems they face.

The other important aspect was to get strong feedback from the financial industry. Amazon lost a tender for $10B with the Department of Defense and they probably had plans to invest that money. The feedback was strong and it says that Amazon is treated as an essential business that has a role even in the strongest downturns. It may actually be the benefit of the company to be closer to the private markets rather than the government. It strengthens their independent decision making. More government contracts come with more scrutiny, rules, regulations. It also brings the company to a zero sum game. When one party wins the other party loses. Doing business at this scale would eventually cause an inflexion point in the growth rates.

Amazon is a first class company. The biggest value of these companies is the brand and what is behind it. One reason I joined Amazon in 2018 because it hires from all over the society. There are no secrets and there are multiple examples that many cases can get publicity and get resolved seamlessly. There are no big surprises … you get the yield of 0.4%. Transparent handling of issues is a prerequisite of essential business. Amazon is a synonym of online retail.

The second class are organizations like Microsoft, Apple and even the Department of Defense. The brand of these companies is not a synonym for an industry but it is their bread and butter. Professionals join the company because of the brand, they are more like an elite college from this perspective. They built up some ethical capital, so they have to keep issues inside. This usually means that any scandals get resolved with a huge sum and a non-disclosure agreement for silence. While this is a legal practice in the short term it may reveal problems in the long run, when holding the dams becomes more expensive and opacity scares talent.

The third class of companies are the learning companies. Startups are free to experiment on venture capital and some of them may even disrupt law in the process. While the sales and marketing may look very professional, issues might arise in the short term. If a business is not essential and they have lower capitalization they rely on their partners and investors to keep afloat. This reduces independent decision making and ethics may suffer. The result can be lower tenure causing inefficiency. Large margins may deter everyday customers. Employees look for somewhere else for long term career goals. Companies may have to fight against influence for shadier investors, special interests or even secret services.

The fourth class of companies is practically the D class, when you cannot expect anything else but lies. You may still see a perfectly cut lawn but you would notice the unnecessary tradeoffs of lying. Constant IRS audits, hard to understand product binding are typical characteristics.

The yield curve of the Amazon is interesting. Growing yields might mean that investors do not expect any short term downturns of Amazon. The fact that they sell bonds instead of own shares might mean that they are experimenting and Bezos wanted to do an elephant walk to present his tools and network to deter competitors. Any reserve bank easing has a lower impact on small businesses, if the capital is swiped by the blue chips. Issuing bonds help existing institutional investors like retirement funds to keep their sustained gains and voting power. It may also help some investors with predictable funds to invest to protect existing investments with debt that is paid before shares in case of a bankruptcy. I believe the most important information that the low yield of the Amazon bond represents is that the investors trust that the company’s existing physical and intellectual assets can cover the issuance.

It is an interesting aspect that the rental company Hertz just went bankrupt. Vehicle manufacturing and renting is traditionally a low margin business. It is logical for them to raise money using debt financing. This money could have been borrowed by them. Car rental is similar to server rental, so it might be a logical step from Bezos to consider acquiring Hertz with the money to have another gem in the crown next to Whole Foods.

There are many cloud and online retail vendors. It is not rocket science. Amazon has plenty of data centers that are worth more than the bonds issued. I see two risks. Datacenter servers may be expensive but the technology of Intel processors is not new. Many design tradeoffs were discovered in the past two years in the 20 year old design. The other important conclusion is that investors think that there is a market for datacenter hardware. This suggests that there is growth potential in the cloud business.