Investing

Amazon Could Split Itself Into 2 Companies

Douglas A. McIntyre

Published: April 6, 2018 6:35 am

Last Updated: January 12, 2020 1:43 am

President Donald Trump believes that Amazon.com Inc. (NASDAQ: AMZN) has long taken advantage of the American tax structure and the price the U.S. Postal System (USPS) charges the e-commerce giant. Amazon may want to break itself into two pieces under the circumstances, both because it would spin off the company’s fastest-growing unit and it would put the part of the company under siege into a public corporation of its own.

In specific, a spin-off of Amazon Web Services (AWS) might insulate Amazon’s business-to-business operations from attacks on Amazon’s consumer e-commerce businesses. These attacks could become more virulent and may extend over a long period, which could hold the stock price hostage. And, if the attacks are successful, Amazon could face higher taxes and an increase in the sum it pays the USPS.

Amazon’s trouble with the president has dragged its stock from $1,573 to $1,452 a share.

AWS is the company’s crown jewel. It is the leader in global cloud computing and shows every sign of staying in that spot. It no longer relies much on Amazon’s e-commerce service for its sales. It has developed hundreds of thousands of customers of its own. Its revenue is growing quickly, and AWS has huge margins.

Amazon’s e-commerce business, which is divided into two operations that reflect sales from North America and those that come from International, continues to grow at a strong pace but has modest, and sometimes no, margins. Most of the company’s risk is attached to these units, even beyond its trouble with the president. This includes Amazon’s risk as it enters the grocery business and its consumer electronics efforts. It carries almost all the risk of government regulation and lawsuits.

AWS had revenue of $17.5 billion last year, up from $12.2 billion in 2016. Operating income was $4.3 billion, up from $3.1 billion in 2016. The operation is not without risks. It has huge competitors, led by Microsoft and Alphabet.

For the same year, North America had revenue of $106.1 billion, up from $79.8 billion in 2016. Operating income rose from $2.4 billion to $2.8 billion. The unit’s margins are barely 3%. This is the part of Amazon that the president and local and state tax authorities are attacking.

The revenue for Amazon International in 2017 was $54.3 billion, up from $44 billion in 2016. The unit lost $3.1 billion in 2017, compared to $1.2 billion in 2016.

AWS would trade at a premium to the e-commerce business when compared to revenue. Cloud computing, many experts believe, is the future of commercial technology. Amazon investors may want to put their money into a company with these characteristics and not the risk-burdened e-commerce operations.

It is not clear that breaking Amazon in two would help with its potential antitrust problems. However, for worried investors, it would make a great deal of sense. AWS also might be a better investment than Amazon as a whole is now.