Jeff Bezos and the $100 billion gorilla in the room

By Chris Nolter, Senior Writer at The Deal:  The value of Inc. (AMZN) cloud services business is increasingly clear following the first quarter earnings season. While not as visible to consumers as its e-commerce business, or as flashy as the Seattle online retailing giant’s video series Mozart in the Jungle (which won a Golden Globe) or Transparent (which won an Emmy), Amazon Web services is as ubiquitous in the technology world as its smiling boxes are on the stoops of homes. Amazon Web Services is on track to generate $10 billion in sales this year, a benchmark that it reached faster than its parent company, and margins are much better than the e-commerce business.

As the cloud unit continues to grow, and accounts for a third or more of Amazon’s $330 billion market cap, a perennial question arises: whether Jeff Bezos should break off the IT technology juggernaut that has shaken up the market for Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT), IBM Corp. (IBM), Dell Inc., Hewlett Packard Enterprise Corp. (HPE), EMC Corp. (EMC) and others. While Bezos gets high marks as a businessman, Amazon could potentially draw attention from activists if it appears that the stock does not fully value AWS.

Jonathan Morgan of The Edge, who heads of team of analysts tracking spinoffs, has called for the breakup since December 2014. Aside from the disparity in profitability, Morgan suggests that that AWS would grow faster if separated from Amazon. “There will be more attention on the AWS side rather than Amazon’s core business,” he said.

Amazon has acknowledged that AWS will require continued investment, which Morgan noted would weigh on free cash flow. An IPO could provide capital to invest in the business. “The next best thing for them is to look for is some sort of breakup,” he said. Freed from parent Amazon, Morgan suggests that AWS could be a merger partner for Inc. (CRM), EMC-backed VMware Inc. (VMW) or even Google (GOOG).

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