Amazon’s shares have had a bad year. If Jeff Bezos wants to fix this, he need only utter these words: “Amazon’s retail and web services operations will, in time, be separate companies.” Admittedly, it is hard to claim that a company trading at more than 100 times earnings suffers from a conglomerate discount. Still, Amazon Web Services has grown up. Its overlap with Amazon’s core business is decreasing. Amazon is a great retailer. It should not be a conglomerate.

Amazon said this week that revenues at AWS are growing at 40 per cent a year; the volume of data it stores is more than doubling. AWS has five times as much capacity as its next 14 competitors combined, and a million monthly users. Having got its start in commoditised infrastructure (storage and computing power), AWS has added fancier services which help retain customers and improve margins.

One example is Aurora, a database engine that Amazon claims is five times as fast and one-tenth the cost of the leading competitor (cough, cough, Oracle). Gartner says Amazon’s premium customer support is better than most competitors. A long list of Fortune 500 companies and some 900 government agencies use AWS.

Those burgeoning revenues appear to be about $5bn presently. If the spun-off AWS shares traded at the same multiple of revenues as its (much weaker) competitor Rackspace, it would be worth $17bn.

A much higher valuation is easy to imagine. Even so, AWS loses money. Morgan Stanley thinks AWS’s operating margins are in the negative double digits.

The losses are part of what makes a possible spin-off attractive, though. Separating AWS would make Amazon a much more profitable company. On its own, AWS would have to find a way to fund its losses.

That may not be too hard. In the current climate, a fast-growing “cloud computing” company need only hold out its hand to get debt or equity financing.


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