Should Amazon Split in Two?

Citi Research just said it thinks so, but the idea isn't exactly new.

Motley Fool Staff
Motley Fool Staff
Sep 19, 2018 at 11:27AM
Technology and Telecom

In this segment fromĀ MarketFoolery, host Mac Greer and senior analysts Andy Cross and Jim Mueller weigh in on an analyst note asserting that Amazon (NASDAQ:AMZN) could unlock more shareholder value if it separated its e-commerce and Amazon Web Services segments, as well as avoid the risk of more muscular regulation. The trio are skeptical about the idea, for a whole host of reasons.

A full transcript follows the video.

This video was recorded on Sept. 11, 2018.

Mac Greer: OK, let's talk about another founder-led business. Amazon, in a note to clients on Monday, Citi Research says Amazon should split itself up to reduce the risk of regulation and increase shareholder value. Citi analyst Mark May says, by separating the retail and Amazon Web Service businesses, Amazon could minimize or avoid the risk of increased regulatory pressure. Andy Cross, what do you think about this idea of Amazon breaking itself up?

Andy Cross: I don't think it's going to happen anytime soon. And it's not new. For the last five years, analysts at various times have called for Amazon Web Service to be spun off.

Greer: But this note is new. Don't throw a wet blanket on this story. [laughs]

Cross: I'm not! The note is new, and the regulatory issues are different than what they were a few years ago. But just for context, Morgan Stanley talked about this in November 2014. They pegged Amazon Web Services worth about $32 billion in enterprise value. That was when Amazon was at $150 billion in enterprise value. Today, that's worth almost a trillion dollars. This is why Amazon Web Services getting spun off by Jeff Bezos and his team is not a story that I will entertain anytime soon. Amazon Web Services is the real growth engine behind the Amazon story. The last quarter, it was up 50%, and accelerated revenue growth for the last three quarters. It is growing so fast, it is so part of the ecosystem of Amazon, helping support all of their e-commerce initiatives, all of the initiatives where Jeff Bezos wants to go into, whether it's video or other initiatives. Prime, for example. It's such a part of the Amazon story that the likelihood to spin it off anytime soon, especially as they've now crossed a trillion dollars in market cap value, I think is not likely.

Greer: Andy, I want to go back to something you just said there. May did estimate, in this note from Citi, he said that the enterprise value for Amazon's retail segment estimated around $400 billion. And for Amazon Web Services, $600 billion. It's amazing to me. I'm an Amazon shareholder. But now, Amazon Web Services, more valuable than Amazon retail?

Cross: The profitability behind Amazon Web Services now is north of 20%, 25%, vs. the North American business, which is less than 3% profit margin. It's more profitable, it's growing faster. It's a real gem inside Amazon. You'd think that the valuation of that business is at least as high as a larger e-commerce business.

Jim Mueller: It's going to be higher, definitely. AWS has provided about 60% of the $5 billion in operating profit the whole company brought in for the first half. That grew 68% year over year and 79% for the second quarter. AWS has operating profit, it's a big driver.

Another nice thing to consider is that CFO Brian Olsavsky points out that Amazon is, if not the biggest customer of AWS, certainly one of the largest. If they are forced to split, then Amazon's going to have to build either pay market prices for AWS's products and services, or build their own infrastructure. Going the other direction on this symbiotic relationship, Amazon is also a great beta tester for everything that AWS wants to bring forth. There's real strong arguments for keeping them together.

Cross: Also, to that point, if they did separate, it would bring a little bit more scrutiny into that link up. I'm not too sure if they really want to go there, from a competitive position. Now, I could see how a lot of retailers who might use AWS would say, "Why are we giving business to one of our biggest competitors?" especially as those other retailers who might be using Amazon Web Services to grow their e-commerce business continue to put more resources toward e-commerce. However, I think the tie-in with AWS and Amazon is so strong as a part of the story that a spin-off anytime soon is unlikely.