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Will AWS Be Spun Off Into a Separate Company? (businessinsider.com)
Ammalgam writes from a report via Business Insider: A credible business school professor who correctly predicted that Amazon would buy Whole Foods now says an AWS spinoff is inevitable. Marketing guru Scott Galloway said Monday at Business Insider's IGNITION conference. The move will also help the company placate regulators who are starting to scrutinize its anticompetitive practices, said Scott Galloway, a professor at New York University's Stern School of Business. After the e-commerce giant spins it off, Amazon Web Services (AWS) "will be one of 10 most valuable companies in the world," he said. "The question then becomes, what happens to the old retail-side of Amazon," Galloway added.
Amazon will decide to split off AWS, because it makes a lot of sense and market forces will dictate it, Galloway said. Cloud computing is one of the most important trends taking place in the technology industry, but there's no simple way for investors to profit off it. The three biggest cloud services -- AWS, Microsoft Azure, and Google Cloud -- are all part of much bigger companies whose results only partially reflect their cloud businesses. As the biggest of the bunch, AWS would be a natural to become its own standalone business, he said. And it could be a huge windfall for Amazon shareholders. Depending on how it would be valued and the multiple to earnings that the market would assign to it, AWS by itself could be see a valuation of anywhere from $70 billion to $600 billion, he said. What do you think? Is this possible?
Amazon will decide to split off AWS, because it makes a lot of sense and market forces will dictate it, Galloway said. Cloud computing is one of the most important trends taking place in the technology industry, but there's no simple way for investors to profit off it. The three biggest cloud services -- AWS, Microsoft Azure, and Google Cloud -- are all part of much bigger companies whose results only partially reflect their cloud businesses. As the biggest of the bunch, AWS would be a natural to become its own standalone business, he said. And it could be a huge windfall for Amazon shareholders. Depending on how it would be valued and the multiple to earnings that the market would assign to it, AWS by itself could be see a valuation of anywhere from $70 billion to $600 billion, he said. What do you think? Is this possible?
Only an investment banker would think like that. If you take the same technological infrastructure, pull it out of one company and shove it into another while distributing the new shareholding pro-rata, why exactly is there an expectation that suddenly this 'huge windfall' of new value has been created?
No new value has been created. If anything there will be higher costs from duplicated overheads. The fact that despite this the claim is probably correct and shareholders will get a big bump if this happens (just like when a company does a share split) is testament to how screwed up the economy's idea of 'value' is right now.
I mean, what a mockery this makes of all the work the engineering teams have to put in to add new capacity and services. Why don't we retrain all our engineers as financial innovators. Then our society can become really rich right?
A large part of the value that AWS provides Amazon is that they are able to consume AWS for their own infrastructure, with paying customers helping to defray the cost of operations. In addition to that, Amazon will lose a non-trivial percentage of its best infrastructure people where currently AWS folks are part of the labor pool they can use.
If it made sense to spin it off, it would have been done by now. Spinning off AWS is nothing more than an investment banker's wet dream.
Interesting how both Amazon and Nokia both started as companies dealing in paper but have eventually ended up in tech. Maybe I should open a library?
I'm not entirely sure Amazon can spin out AWS given it largely backfills the losses on the retail side. Without the cloud cash cow to cover it, Amazon will have to cut back on a lot of its experimentation (drones, cashless stores, Alexa, etc.) and focus on trying to drive down costs to beat their slim margins.
Since Amazon retail competes with so many sectors and has announced it is going to get into banking, pharmacy, etc, many other companies loathe to use AWS. They are worried AWS would be able to hack in and peek into their data. Even if the data is really secure and secret, they hate giving money to a competitor. So if it is spun off, it might gain more customers and become even more profitable. But rest of Amazon has great brand name and loyalty, but very small profit potential. Its main appeal is low cost. So it can't raise prices all that easily.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
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Amazon is in gross violation of 100 year old Anti-Trust. The only business they have that makes any money is AWS and they have been engaging in illegal subsidizing schemes to sell below cost of goods to drive out the competition in the other business lines.
I use to do some consulting work for a company that made one type of product, their business was cyclical so they rented their workforce and machinery to an other company that made a different product all together. This company was still known for their product that they sold, but made a lot of money renting its services to others companies that had a different cycle.
If something is so important that you feel the need to post it on the internet... It probably isn't that important.
Bezos has never done things to be "a huge windfall for Amazon shareholders". He's been running the whole company at almost zero retained profit, dumping cash into expansion at every opportunity. He's never really cared about shareholders like that. Why would he suddenly change now?
Investing in Amazon is like investing in a startup. You know all the cash is going to grow, and you hope it becomes super-profitable later. Which is kinda cool that he's been able to maintain that for decades.
Your ad here. Ask me how!
I'm not saying it is exactly the case with Amazon, because I don't know the company well enough, but in general your statement does not necessarily hold true (that risk flows perfectly after the split). Default risk might be largely external to the company and won't change after splitting less risky part off. Having less risky part in will just mean it will get eaten up by bond/loan payoffs in case of default of entire company. What split can cause is that bonds/loans for retail part might be more expensive, as there will be less to recover. But for equity price (which anyway goes to zero in case of default) it is mostly just the risk, not recovery rate which is important.
LMOL "in general your statement does not necessarily hold true "
We're not talking in general, Potsy, we're talking about a specific case with known facts!
We know that the Amazon Retail business is subsidized by the Amazon Cloud business. Cloud is the revenue generator. Take that away or more to the point, separate the financials, and now people see how Amazon Retail business is a drag on Amazon. Suddenly their market cap takes a hit.
So while there may be untapped growth potential for Amazon Cloud, the overall effect on Amazon would not make it widely more profitable. In fact it would more likely make investors demand Amazon to sell of their retail side.
Jesus can people take their head out of their asses.
A credible business school professor who correctly predicted that Amazon would buy Whole Foods now says an AWS spinoff is inevitable.
Just because he guessed right once doesn't mean he'll guess right again. And I don't think Bezos gives a shit what short term windfall shareholders might want.
While a spinoff is certainly a possibility, I don't think it will happen any time soon. Part of the reason Amazon was able to make that business work is because it makes use of excess capacity on servers they already had to buy for other purposes. There also is something of a dog-fooding component to the business where Amazon learns what works and what doesn't on their own business which has some obvious utility. Now AWS has become kind of its own thing rather than a way to just use excess servers but there still is a lot of benefit to them to have both under the same roof.
I do think that AWS will be a huge business and possibly eventually much bigger than their retail operations. But for the near future I think there is much too much synergy between them to justify a spinoff.
While not on the verge of bankruptcy, it will never be a cash generating machine in the current competitive environment.
That is not true at all. Amazon retail generates HUGE cash flow. Amazon's operating cash flow is enormous. Amazon also has a negative cash conversion cycle, meaning they pay their suppliers WEEKS later than they get paid. Very few companies achieve this happy state of affairs and none of their major competitors (including Walmart) can match them on this.
Don't confuse operating cash flow with profit. Amazon generates excellent operating cash flow but then they plow it back into the company to grow so their profit margins look weak.
AWS is a high margin monster with limited competition and a high degree of lock-in and network effects. These tend to be sustainable sources of value/returns.
All true as well though I disagree that there is limited competition. Google and Microsoft are pretty serious competitors and they aren't the only ones.
As of right now, anyone investing in AWS has to take the risk that AWS profits will be funneled off to cover losses in Amazon's retail business
Amazon makes nearly as much profit from their US retail business as they do from AWS. Don't take my word for it, see their financial statements. The only place they are losing money is their international retail business which they are trying to grow with mixed results. In 2017 Amazon made a profit of $2.8B from their retail operations, $4.3B from AWS and lost about $3B in international operations which was increased substantially from the previous year due to infrastructure investments. (in 2016 their international ops only lost $1.2B)
It is not uncommon for conglomerates to be worth more separate than together.
Amazon isn't a conglomerate in the traditional sense like GE or Siemens. You are correct but sometimes the whole is greater than the parts. See Berkshire Hathaway...
$1.65 billion in profit last quarter. Their international retail sales is still losing money, but it's swamped out by their North American sales, which made nearly as much money as AWS last quarter ($2.03b vs $2.08b).
That's probably the rationale behind thinking AWS will be spun off. Normally you stick a money-making division together with a money-losing division. That allows you to take the money from the money-making division, and invest it into improving the money-losing division. That reduces your net income (profit), and thus your taxable income. Once both divisions start making money, there's no longer any reason to keep them together. You're better off finding new businesses projects to invest in which can act as a money sink.
Market conditions will not force the split, as AWS is not in the same industrial space as online retail sales.
There are already some signs of retailers leaving AWS because they see Amazon as a competitor and don't want to send them money. If this continues, it is another good reason to split up Amazon's retail and web service divisions into separate companies.
-- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke