Would Amazon Spin Off This Profitable Division?

 
on February 12 2013 10:20 AM

Amazon’s (NASDAQ:AMZN) cloud computing division may dominate the industry, but the Internet retailer may be looking to divest that unit; at least according to Oppenheimer analyst Tim Horan, who thinks that Amazon Web Services would do better as a separate publicly traded company.

“We believe an ultimate spinoff of AWS is inevitable due to its channel conflicts and the need to gain scale,” Horan wrote in a note seen by Investor’s Business Daily. “We see the business as extremely valuable on a stand-alone basis, possibly even operating as a REIT,” a type of investment trust.

For the cloud computing division, separating from Amazon would mean the service would no longer be working with rivals; Amazon’s Prime Instant Video service competes with Netflix (NASDAQ:NFLX), a client of AWS. Currently, many public cloud users, including online retailers, have little choice but to fund one of their biggest rivals, Amazon. But by leaving Amazon, the infrastructure-as-a-service could expand its customer base.

While it may be in AWS’s best interest to become a separate company, especially as it will no longer be footing the bill for Amazon’s low-margin retail business, Amazon may come to the decision under pressure. In Horan’s opinion, the new competitive landscape — Google (NASDAQ:GOOG) is challenging Amazon in both Internet retailing and clouding computing — will increase the “number of defections” from AWS and cause a loss of market share that will force the Internet company to separate its businesses.

But despite Horan’s confidence in the mutual benefits, it may be difficult for Amazon Chief Executive Officer Jeff Bezos to surrender the company’s so-called crown jewel. That sentiment was made clear in an interview the head of Amazon Web Services Andy Jassy gave the Telegraph at the end of December. “At the highest levels of this company, we believe that it’s quite possible that AWS ends up being the largest business in Amazon,” he said, comparing the arrival of cloud infrastructure services to the replacement of independent power generation with an efficient/scalable national grid.

While Amazon does not divulge the details of AWS’s financials, the profitability of its infrastructure-as-a-service unit is assured. Analysts have estimated that its 2012 sales greatly increased from its estimated figure from 2011. Horan placed its revenue at more than $2.1 billion, representing a 77 percent increase from the previous year. But AWS’s 2012 revenue also represents a very small percentage of the $61.09 billion in revenue the company generated in 2012, making it seem more likely that Amazon could let the division go public. It is by far the largest provider of infrastructure-as-a-service, and so it would likely fetch a large initial public offering price.

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