Amazon.com Inc.'s (AMZN) cloud computing unit, Amazon Web Services, would be a formidable company on its own, but it might not make sense for Amazon to spin it out.
AWS sales are on track to nearly triple from $12.2 billion in 2016 to $35.2 billion in 2020, Canaccord Genuity Inc. projects, with a compound annual growth rate of 30.2%. Keep in mind that cloud-centric Salesforce.com Inc. (CRM) is still trying to crack $10 billion in annual sales.
Canaccord Genuity estimates Amazon's cloud unit is worth about 7.1 times revenue, or $162 billion. The firm uses a 1.3 times revenue multiple to value Amazon's e-commerce business, which has substantially lower margins, at $234 billion. Adding AWS and the e-commerce business, plus Amazon's net cash, puts the company's equity value at $440 billion. That comes to $860 per share versus Thursday's close of $780.45.
At some point, wouldn't it benefit Amazon to spin out AWS to allow it to be more fully valued and the business more focused?
Not necessarily, says Bradley Vizi, managing director at Legion Partners Asset Management LLC, who suggests that AWS is better off remaining part of Amazon.
"First, the future of computing and the migration of workspaces to the cloud is one of the most compelling growth stories at the enterprise level," Vizi wrote in an email. While AWS is the clear leader, it is in a race with Microsoft Corp. (MSFT) and Alphabet Inc.'s (GOOGL) Google and benefits from the resources of its parent.
"We suspect the financial fire power to achieve that scale and truly disrupt the market will require AWS to continue to remain under the umbrella of [Amazon]-sheer capex/engineering software development needs are massive for AWS and I suspect the growth profile that it is trying to achieve would not be able to be supported by AWS' revenue base alone," Vizi continued.
THERE ARE OTHER BENEFITS from keeping the businesses together, he suggested. Amazon has vast cloud computing needs itself and serves as an ideal anchor client for AWS. Amazon developed the cloud business to help meet its internal demands for computing power as its e-commerce business grew.
In addition, artificial intelligence and machine learning are key to the future of both e-commerce and cloud computing, and both business benefit from the crossover of raw data and engineering. Vizi suggests that the core technology behind Amazon's digital assistant Alexa also underpin the Lex features of AWS that let customers integrate speech recognition into their apps. "AI/machine learning is only as good as the amount of data you have to feed it and [Amazon]'s operations are generating a lot of raw data to learn from," he noted.
Of course, valuation is the motivation for many breakups. When corporate structures become complicated, encompassing businesses with different growth or profit characteristics, they become difficult to value and share price often suffers.
Amazon does not seem to suffer from a clouded valuation, however. "Just take a look at the share price performance ever since [Amazon] started to break out AWS financials-clearly the market is giving the combined businesses credit for the future of AWS," Vizi wrote.
The stock has just about doubled from $389.99 per share on April 23, 2015, when Amazon first broke out AWS results in quarterly earnings to close at $780.45 on Thursday. Amazon.com's AMZN cloud computing unit, Amazon Web Services, would be a formidable company on its own, but it might not make sense for Amazon to spin it out.