AWS is a profit machine that Amazon should spin off

AWS is currently the dominant cloud provider, with 32% of the cloud computing market. At the same time, Amazon is a major force in the e-commerce market, and several of its acquisitions have helped it become a significant player in other industries. Amid increased antitrust scrutiny, I expect Amazon to spin off AWS.

Let me start by saying, while the threat of anti-trust action against Amazon is real, I think it will happen to Google and Facebook first. It will happen to Amazon only after those two, and that will be in a couple of years.

I personally think Jeff Bezos, who’s the smartest businessperson in the world, will likely spin AWS before the danger becomes grave. When that happens, I think the most valuable company in the world will be a recently spun, independent AWS. The largest, most profitable cloud company in the world would be a stock that everyone would own.

AWS is Amazon's silent (but deadly) superpower. It's a "silent server" for a huge swath of the digital economy, powering the operations of millions of companies from Netflix, to Slack, and Shell. Last quarter it made up 12% of Amazon’s sales, bringing in a gnarly $11.6B — and it made up over half of Amazon's total profit. 

There certainly are risks with spinning AWS off.  First, Amazon’s profit and growth are highly dependent on AWS. Amazon might struggle to show the impressive profit and growth figures without AWS. One only needs to look at eBay without PayPal to understand what might happen to Amazon if AWS is spun off. However, Amazon is not eBay and its revenues and profits are much more diversified.  Amazon's Marketplace (3rd party sellers), physical stores including WholeFoods, Twitch and its ad revenue are prime candidates to step up and fill the gap. 

It's also an act of self preservation for Amazon. By spinning off AWS, it could potentially preempt any antitrust action that may be started against it. Rather than wait to be broken up, It would be better off doing so on its own terms in the form of a voluntary spin-off. With the Democrats' impending control of the Presidency and both houses of Congress, this might become more of a necessity than a choice.

With AWS generating the bulk of Amazon’s operating profits, its true value is no doubt being held back by the rest of the company - again PayPal is a case point. Besides unlocking shareholder value, the spin off will generate more business for AWS. I strongly believe that the full potential will not be reached with the baggage of Amazon. With Amazon competing in multiple sectors, some businesses won’t use its cloud services over worries of supporting their competitor. As a standalone firm, AWS would not be seen as having conflicts of interest that would jeopardize potential business opportunities.

If anyone needs evidence of how successful a spin-off could be, look at PayPal. Untethered from eBay, PayPal has in five years been able to expand its market share in the payments business through acquisitions and strategic partnerships. This would not have been possible as part of eBay. Now PayPal boasts a market cap of $265B versus eBay’s $36B.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.