Amazon Could Split Itself Into 2 Companies

By Douglas A. McIntyre Updated Jan 12, 1:43AM EST · Published Apr 6, 6:35AM EDT

Follow 24/7 Wall St. on Google

This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.

Amazon Could Split Itself Into 2 Companies — © Thinkstock

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.

[nativounit]

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.

[wallst_email_signup]

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.