Amazon (NASDAQ: AMZN) is reported to have made a shocking decision in recent days. According to CNBC, it is issuing $25 billion in debt to fund its data center build-out. While it doesn’t plan to issue any more debt beyond that in 2026, it’s a big deal because Amazon’s long-term debt has been soaring in the past few years.
Building data centers isn’t cheap, and the cash has to come from somewhere, but is this the right move, or should it scare investors?
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The payoff could be immense
In recent years, Amazon’s debt load has skyrocketed from the company’s historical levels.
The latest $25 billion sale of debt adds to this total, but Amazon has the cash flow to fund the repayment. The reality is that it’s vital for the company to grab as much cloud infrastructure market share as possible in these early days of the AI build-out; it will be more difficult to win clients away from other cloud providers once everyone has their preferred vendor.
The company is currently leading the way among AI hyperscalers in data center construction plans, and it expects to lay out around $200 billion in capital expenditures this year. Over the past 12 months, Amazon generated just shy of $150 billion in cash from operations, so the gap between funds coming in and cash flowing out had to be closed somehow.
As a result, investors should not feel too blindsided by this debt issuance. But is it worth it?
CEO Andy Jassy said in his shareholder letter that the nature of a cloud computing business requires increased capital input when it’s growing rapidly. Data centers aren’t cheap to bring online, but they do have great payoffs over long time frames. Jassy also mentioned that a significant amount of the new computing capacity that $200 billion will buy is already under contract to customers, so it isn’t just taking a leap of faith when building these data centers.
Once the construction is over and the company is benefiting from a much larger cloud computing footprint, its gains in revenue and cash flow will be immense, and should dwarf any concerns about its rising debt load. Current market conditions and demands dictate that management build more data centers, and that’s exactly what it’s doing.
With Amazon Web Services being a major part of the cloud computing landscape and an important part of the company’s overall business, now is a perfect time to buy the stock, as Amazon’s growth over the next few years could be immense.
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Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
Amazon Just Announced Shocking $25 Billion News. Should Investors Worry? was originally published by The Motley Fool
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