Amazon (NASDAQ:AMZN) is typically referred to as an eCommerce giant. The company started as an online retailer, and sales through amazon.com and physical outlets like Whole Foods make up the bulk of its revenue, so that makes sense to think of Amazon stock when you think eCommerce.
But when it comes to profit the hero is actually the company’s cloud computing division, Amazon Web Services (AWS). And AWS is expected to be a primary driver of AMZN stock value going forward. But what would happen to the Amazon stock price if the company spun off Amazon Web Services?
If that sounds like a ridiculous premise, think again. In an era where tech companies are under antitrust scrutiny, and a front-running presidential candidate is campaigning on a “break up big tech” platform, it could happen…
AWS as a Driver of Amazon Stock
In the company’s Q3 earnings reported in October, total revenue was $70 billion, while the revenue generated by its Amazon Web Services unit was $9 billion.
When it comes to revenue, AWS is an important part of the overall picture but pales in comparison to the eCommerce revenue. However, when it comes to earnings, the story is very different. At $2.1 billion, AWS accounted for nearly 72% of the company’s $3.2 billion in operating income for the quarter.
AMZN stock has been struggling to gain ground since dropping from the $2,000 level it hit this summer, but analysts are bullish on its prospects. Among the investment analysts polled by the Wall Street Journal, the median 12-month target Amazon stock price is $2,200 and AMZN is virtually a universal “buy.”
A lot of that confidence is based on AWS. And why not?
Amazon is by far the largest cloud computing player. AWS has over three times the revenue of its closest competitor, Microsoft’s (NASDAQ:MSFT) Azure. With public cloud revenue projected to hit $331.2 billion by 2022 (from $182.4 billion in 2018), Amazon is positioned to be the primary benefactor of that growth.
InvestorPlace’s Will Healy is among those who make the case to buy AMZN stock because of the boost its cloud computing unit will provide.
Could AWS Be Spun Off?
The unthinkable has become the topic of conversation in recent months. Large tech companies including Amazon have increasingly faced government antitrust investigations and regulatory scrutiny.
They are also under pressure from consumers who are concerned about the use of their personal data. One of the Democratic presidential frontrunners, Elizabeth Warren, is campaigning on a platform of breaking up “big tech” including the splitting up of Amazon.
CNBC reported earlier in the week that Oppenheimer had warned investors of the possibility that Amazon may have to spin off its cloud computing business to help avoid regulatory pressure from the U.S. and the European Union.
In October, Matthew Wilson, an associate professor of political science at Southern Methodist University told Adweek that Amazon could choose to spin off AWS as a preemptive move against regulation.
“If the writing is on the wall and pressure is building for regulatory action … then [Amazon] might decide to do it in a way they can control.”
Spinning off AWS may not be likely, but it is a real possibility given the current political and regulatory climate.
What Would That Do to AMZN Stock?
If AWS were to be spun off, the results wouldn’t be pretty for Amazon’s stock price.
The company is facing increasing competition on the retail front as brick and mortar giants like Walmart (NYSE:WMT) become more aggressive and more adept with their online presence.
Amazon remains a market leader for smart home devices like its Echo smart speakers — another segment with significant growth potential — however, competition has been heating up in that segment as well.
Ultimately, as those Q3 numbers show, removing AWS from Amazon would mean the company is marginally profitable at best. It seems unlikely the current Amazon stock price would hold — let alone the $2,200 analysts are projecting.
But all of that is conjecture. At the moment, with spinoff talk being nothing more than “what if” scenarios, AMZN stock remains a solid buy. But keep an ear out for developments on the tech industry antitrust and regulation front.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.