3 Reasons Amazon Should Consider Separating From AWS
Since Amazon (NASDAQ: AMZN) started reporting Amazon Web Services (AWS) revenue and operating profits in 2015, a growing number of analysts called on the tech giant to part ways with the growing cloud business.
As a long-time Amazon investor, I have repeatedly opposed this idea, for one simple reason. AWS generates higher margin revenue than Amazon’s retail business, so it actually drives most of Amazon’s profit growth, while supporting the expansion of its sales ecosystem. retail with deep discounts, cheap hardware devices, physical stores and other loss-making strategies. .
But over the past year, I’ve gradually warmed up to the idea of ââAmazon splitting from AWS. Let’s take a look at three reasons why Amazon should consider a spin-off – and whether or not it might or might not happen.
1. Amazon has a hidden growth engine
Amazon is actually the third largest online advertising platform in the United States after Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) Google and Facebook (NASDAQ: FB), according to eMarketer, but it has yet to begin to separately allocate its advertising revenue or operating profit.
Instead, Amazon’s advertising business accounts for the lion’s share of its “other” segment, which grew 82% year-on-year revenue to $ 14.8 billion in the first half of 2021. and accounted for 7% of Amazon’s revenue. By comparison, AWS revenue grew 35% year-over-year to $ 28.3 billion in the first half of 2021 and represented 13% of Amazon revenue.
Amazon has yet to break down operating profits for the âotherâ segment, but market-leading advertising platforms typically generate higher revenues than cloud infrastructure platforms.
For example, Facebook – which generates almost all of its revenue from ads – ended last quarter with an operating margin of 43%. AWS, the only major public cloud infrastructure platform that generates consistent profits, ended the last quarter with an operating margin of 28%.
Therefore, Amazon’s advertising business is likely to operate with higher margins than AWS and generate much stronger sales growth. Meanwhile, AWS faces intense competition from Microsoft‘s (NASDAQ: MSFT) Azure and Google Cloud, and it could be forced to match their recent price cuts for their third-party cloud market fees (3% for both platforms, compared to 5% for AWS).
Based on these facts, it makes sense for Amazon to part ways with AWS as it continues to grow and relies more on its booming advertising business for future profit growth.
2. It could appease antitrust regulators
AWS gives Amazon a decisive advantage over most other retailers, as its higher margin revenues support the expansion of its Prime ecosystem with lower margin strategies. That’s why many large traditional retailers prefer to use Microsoft’s Azure or Google Cloud instead of supporting the growth of Amazon’s biggest profit engine.
Amazon also faces constant pressure from antitrust regulators in the United States and abroad regarding dominance in its e-commerce markets. AWS, which Canalys says controls 31% of the global cloud infrastructure market, is also under close scrutiny by regulators, and it could be investigated if more retailers complain about profit-generating synergies between businesses. retail sales from Amazon and AWS.
AWS’s proactive split could appease regulators, make AWS more attractive to Amazon’s retail competitors, and give Amazon more leeway to grow its advertising business.
3. AWS would no longer need to support retail
AWS supports Amazon’s profit growth, but Amazon’s retail business is also preventing AWS from reaching its true growth potential. The AWS split would allow the cloud company to invest in its own future growth without having to support Amazon’s low-margin markets and stores.
This separation would be comparable to eBay‘s (NASDAQ: EBAY) spin-off of Pay Pal (NASDAQ: PYPL) in 2015. During this sale, each eBay shareholder received one new PayPal share for each eBay share they owned. Here’s what happened to the two stocks after the split:
This spin-off unlocked PayPal’s growth potential as a stand-alone business, and investors who retained their shares in both companies made significant multibagger gains in just over six years. We could see Amazon and AWS generate similar earnings as separate companies in just a few short years.
But will a spin-off ever happen?
Amazon CEO Andy Jassy, ââwho previously headed AWS before taking over from Jeff Bezos in July, previously rejected calls to split AWS. However, a spinoff makes more sense each quarter as Amazon’s advertising business grows and the company faces more and more antitrust headwinds. Therefore, I still believe that Amazon could still part ways with AWS in the near future – and investors should applaud this move.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.