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How does increased stock price affect capital

23 points by kartD ↗ HN
For companies with high growth stock (Netflix, Amazon or Tesla), does the increasing stock price mean they have access to cheaper capital? I've seen this mentioned in the news, but I'm confused how that works

7 comments

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sebst
An oversimplified explanation would possibly go like this:

Capital structure (i.e. proportion of debt and equity) is irrelevant in frictionless markets (https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo...).

That being assumed, management of a company can raise capital by either issuing new shares (equity) or by taking on debt. Given that management is rational, they would issue new stocks whenever they believe the stock price is slightly over-valued by the market and always take on debt if they think the opposite.

But in reality, companies cannot always issue new shares. However, potential creditors know the company could issue shares instead of taking their debt. So, they will lower their interest offer.

Does that make sense somehow?

kartD
It does, thanks. So what would be a simple way to find out if Amazon, Tesla etc are getting capital. Would it be digging through their quarterly prospectus?
sebst
I guess so, yes. I believe that a significant proportion of their debt is not traded on the bonds market but agreed upon privately, e.g. with their banks. However, it must be found in their balance sheets.
shoo
Amazon's balance sheet lists $7.7b of long term debt. This increased by $5b between 2013-12 and 2014-12 [1].

The total number of Amazon shares has been slightly increasing over the last 3 years [2]. I wonder why that is? If Amazon management believes their stock price is overvalued, it could make sense to issue new shares to take advantage of that.

[1] http://financials.morningstar.com/balance-sheet/bs.html?t=AM...

[2] http://financials.morningstar.com/ratios/r.html?t=AMZN

kgwgk
> The total number of Amazon shares has been slightly increasing over the last 3 years [2]. I wonder why that is?

Maybe stock-based compensation? (I've not checked)

npxcomplete
Bear in mind that prominent stocks like Amazon don't trade in their value, they trade on perceived future value and settle where that perceived value crosses with the markets risk tolerance.

Amazon has, and will continue, upward because they are capable of breaking into new markets at scale. Unlike Netflix which is quickly approaching market saturation, Amazon has virtually unbounded potential to invade untouched markets as they are currently doing with postal and produce. The result is that we can't see where Amazon's revenue will finally plateau. What we do know is that AWS profits make them extremely resilliant to taking losses in these other markets but at the same time highly vulnerable to competition from other providers like Google.

Fyi google has the better product, but it's better because it puts the kind of people who decide which to use out of work. So industry hasn't flipped yet. When they do expect Amazon to take a big hit.

huac
It's more complicated than just the theoretical M-M propositions - companies should prefer to issue debt (rather than equity) because the interest payments act as a tax shield. However, increased leverage results in higher borrowing costs because of the greater risk of default.