Analysts debate whether AWS should be spun off. In the wake Amazon.com’s earnings report, last week, which included earnings for Amazon Web Services (AWS), analysts are pondering whether the retail giant should sell its cloud business. Amazon.com investors have become increasingly frustrated with the impact that AWS has had on Amazon.com’s profits over recent quarters. Amazon.com has been under pressure from investors to provide a more detailed breakdown on AWS revenues and profitability. Investors were pleased with Amazon.com’s first quarter earnings report last week. AWS is now a $5 billion company and growing. The cloud subsidiary reported $1.57 billion in revenue in Q1, an increase of 49 percent year-overyear. According to analyst estimates, this would put AWS at a $6 billion annual run rate. Amazon.com’s earnings report revealed that AWS is profitable with a margin 17 percent. The Wall Street Journal was told by Ben Schachter, a Macquarie analyst, that AWS is “significantly more profitable than we anticipated.” Finro Equity analyst Lior Rozen was one of many to suggest that Amazon.com be spun off AWS. Ronen stated in a blog post for Seeking Alpha that AWS’ Q1 revenues indicate that the segment has a $6.9 Billion annual revenue rate. This is based on 11% quarterly growth. Ronen estimated that AWS’ value is between $48 billion to $69 billion based on a price-tosales ratio of 7-10. He stated that Amazon could spin AWS to create two tech giants, one focused on ecommerce and online retail and the other on cloud computing or IaaS services. Amazon could use the two companies to create an entire company that is greater than the sum of its parts. AWS could concentrate on its niche, develop new revenue streams and invest further in technology, while Amazon could do similar on its ecommerce platform. This is the only way Amazon can sustain its long-term growth and use the advantages it holds in both its businesses. James Brumely, an Equity analyst, was skeptical about AWS’ long term prospects. Brumely also stated that cloud services will become more commoditized, which will impact future AWS margins. Brumely also stated that Amazon will continue to be under pressure from Microsoft and Google. He stated that even though unexpected operating profits were exciting for Amazon Web Services (AWS), it doesn’t change that the company lost money last quarter. It also doesn’t change that margins for AWS will likely continue to shrink rather that widen as cloud computing continues to become more commodityized. Brumely also said that the margin of 17 percent is not as impressive as it appears. He cited the fact that 291 companies in the Fortune 500 have operating profit of 15 percent or more. He said that AWS’ 17% margin is more alarming than last year’s profit, which was 23 percent, during the same quarter. “What happened?” He asked. “In its simplest form, Amazon has decided to be and remain the low-price leader in cloud-storage and didn’t care about making much, if any, profit. It turned out that it still made an operating profit as a cloud computing provider, but it is making less and less each day. Although the AWS stats from Amazon.com may not be clear, it is a significant step for both investors and buyers of cloud infrastructure services. They are looking for the best deal, but don’t want their provider to lose money indefinitely. Related:
What’s next for AWS after IaaS Doubters are silenced?