Amazon (AMZN) Rating Raised to A2 from A3 at Moody's

Moody's Investors Service, Inc. today upgraded Amazon.com, Inc.'s (NASDAQ: AMZN) long-term rating to A2 from A3, including its senior unsecured rating and legacy Whole Foods Market, Inc. senior unsecured rating to A2 from A3, and upgraded Amazon's commercial paper rating to Prime-1 from Prime-2. The outlook is positive.

"Today's upgrade recognizes the continuing strength of Amazon Web Services, which drove overall operating income growth in 2019 despite heavy investments in free shipping and marketing," stated Moody's Vice President Charlie O'Shea. "Liquidity is robust, with $55 billion in cash and marketable securities and nearly $22 billion in free cash flow in FYE 2019, which results in RCF/ debt of over 50%," continued O'Shea. "Going forward, we expect Amazon's liquidity and free cash flow generation to remain robust despite potential pressures from investment spending."

Upgrades:

..Issuer: Amazon.com, Inc.

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

....Senior Unsecured Regular Bond/Debenture, Upgraded to A2 from A3

..Issuer: Whole Foods Market, Inc.

....Senior Unsecured Regular Bond/Debenture, Upgraded to A2 from A3

Outlook Actions:

..Issuer: Amazon.com, Inc.

....Outlook, Remains Positive

..Issuer: Whole Foods Market, Inc.

....Outlook, Changed To Positive From No Outlook

RATINGS RATIONALE

Amazon's ratings reflect its strong business profile as supported by its ubiquitous brand name with consumers globally and the increasing strength and profitability of Amazon Web Services ("AWS"), which accounts for the majority of the company's operating income. Amazon has a leading competitive position in multiple segments of online retail, a solid line up of entertainment content, and a formidable third party seller business. The rating is also supported by its significant cash flow generation and excellent liquidity profile. This excellent liquidity is centered around cash and short-term investments of around $55 billion at FYE 2019, with approximately $27 billion due to favorable working capital as it represents the excess of accounts payable over accounts receivable. Ratings also recognize Amazon's historically conservative financial policy balanced by limited visibility into future dynamics, the potential pressure on operating profit due to the level and cadence of investment funding for various growth initiatives, the increased online competition from brick-and-mortar retailers, as well as the increasing competitive threats from larger, better-capitalized companies in AWS' universe.

The positive outlook reflects Moody's view that the current generally favorable operating performance of the company, especially on the AWS side, will continue.

Ratings could be upgraded if Amazon's future investments generate commensurate levels of profitability over time such that RCF/debt is maintained around 50%. Additional factors that would be critical for an upgrade are continued maintenance of excellent liquidity and no major deviation from current performance, strategy or financial policy. Given the positive outlook, there is no current downward rating pressure. However, ratings could be downgraded if it becomes clear that investments are not paying off, or that financial policy is becoming meaningfully more aggressive with regard to cash returned to shareholders or acquisitions, as would be evidenced by RCF/Debt around 35%.

Amazon's environmental risk is moderate, as the environmental impact associated with the company's global supply is significant. Amazon has improved its disclosures related to its sustainability practices over the last year and is working to mitigate its environmental impact through its Shipment Zero plan which has the goal of making more than 50% of its shipments net zero carbon by 2030. The company is working to improve its transparency associated with its sustainability practices. Amazon's social risk is also moderate as its labor conditions have been subject to negative media attention and consumers have become increasingly mindful of the treatment workforce. In addition, the third-party selection business, which comprises more than 50% of the company's total sales units, heightens risks to consumer confidence and safety associated with the sale of counterfeit products. However, we note that Amazon has a zero-tolerance policy regarding the sale of counterfeit products via third-party sellers. Amazon's overall corporate governance risk is low given its historically conservative financial policy. The company's board is comprised of 10 members of which nine are independent. Company founder and CEO Jeff Bezos is Chairman of the Board of Directors and beneficially owns approximately 11.7% of Amazon's stock, making him the largest shareholder in the company. Amazon's financial policy as it relates to returns to shareholders is conservative, as the company pays no dividend and share repurchases have been de minimus over the past few years despite a $5 billion repurchase authorization with no fixed expiration. The company's conservative financial policy has favorably impacted the company's liquidity and financial flexibility. Given the continuing investment cycle and the increases in debt it entails, we anticipate that share repurchases will be minimal over the next 12-24 months despite the company's large cash balance.

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