Should Amazon Spin Off AWS?

You know you’re hitting the top of a cycle when M&A activity is massively booming, and that’s where we are right now. Combine this with a feeling in the zeitgeist that moves against massive conglomerates and antitrust violations, and you have a recipe for change.

The Pressure is On

The idea that Amazon should spin off AWS as its own separate company has been floating around for a while. The main reasoning behind this is that it would help avoid regulatory pressure or at least increases in it. With political candidates like Elizabeth Warren making announcements that they would break up the tech giants if they won office (and it being viewed favourably by the audience) companies need to get ahead of the witch hunt.

And that is just in North America. Europe has an even more deadly view towards these companies because they are getting all the anti-competitive behaviour without any of the job creation. Sure, they can increase taxes and fines for now, but how does this affect them in the long-term? The end game will eventually have to lead to antitrust action.

Data privacy is becoming a greater concern (especially in Europe) and from the perspective of both consumers and regulators, Amazon has too much control. The idea of a company owning all your cloud data and being able to manage the majority of e-commerce makes people uncomfortable. At the same time, it feels eminently possible to break up these two companies without causing a major problem.

The Industry Landscape

Right now, the two biggest competitors in the cloud space are provided by Google and Microsoft. Just like how there are data privacy issues with Amazon, these companies have them as well. And from an investor’s perspective, there is no route to invest directly in these big cloud providers right now. So the ability to invest in the leader in cloud technology as a standalone company would be huge.

This is why it is likely that if AWS were spun off, a premium would result for it being separate. In fact, based on reasonable multiples of revenues or profits (EBITDA), AWS could be one of the top 10 most valuable companies in the world. Amazon’s shareholders would benefit from this spinoff as well, assuming the spinoff resulted in a high gross value separate than together. Capitalism could be the key reason to do this, even though regulation is at the gates.

The good news for this plan is it seems like it is doable and could be pulled off. AWS profits may provide some support for Amazon Prime, but the company’s profit drivers are shifting and may be able to function in isolation at this point in time. The biggest reason for Amazon to hold onto AWS is the continued growth that is expected, and how they could profit for it by keeping AWS as a part of Amazon. If it were to be spun off, the stable growth aspect of Amazon would disappear, and investors may need to reevaluate their initial thesis.

Regulation may well be the one thing that can stop big tech, but Jeff Bezos always seems to have a plan, so it it’s possible his next play is to pre-emptively take action to avoid interference from regulators and placate them for a bit. Or perhaps he has a different big move in mind.

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