Amazon.com Won't Spin Off Amazon Web Services in 2018

Markets Motley Fool

The call for Amazon.com (NASDAQ: AMZN) to spin off Amazon Web Services, its cloud computing division, only got stronger in 2017. AWS is now generating revenue at a $20 billion run rate, making it by far the largest public cloud provider. If it were to spin off, AWS would be worth more than all but a few standalone companies.

Continue Reading Below

But Amazon has some very good reasons for keeping AWS and its retail business under the same roof. CFO Brian Olsavsky reviewed some of them when asked about the corporate structure on the fourth-quarter earnings call. "We see a lot of value in all of our businesses, and AWS is a key component," he said before launching into a list of benefits for keeping AWS in-house.

While spinoffs are an attempt to create value for shareholders, an AWS spinoff could actually have the opposite effect for Amazon shareholders.

Why the call for a spinoff strengthened in 2017

AWS lost two big customers in 2017, and it's easy to put the blame on its parent company.

In June, Walmart (NYSE: WMT) called for its technology vendors to use a different cloud provider. Then in September, Walmart reportedly began plans to build its own data centers to cut ties with AWS for good.

Continue Reading Below

Target (NYSE: TGT) is also in the process of moving its e-commerce and mobile development operations off Amazon's cloud and onto a competitor's.

There's an obvious reason Walmart and Target wouldn't want to do business with AWS. "It shouldn't be a big surprise that there are cases in which we'd prefer our most sensitive data isn't sitting on a competitor's platform," a Walmart spokesperson said. As Amazon continually takes share of the retail market -- not just online retail -- Walmart and Target have the most at stake.

Even if Amazon doesn't have direct access to the competitors' data, Walmart and Target are still indirectly funding Amazon's growth by using AWS. That's probably not in their best interest.

Amazon is the biggest customer of AWS

The problem with spinning off AWS is that Amazon's retail operations are closely tied to the cloud business. They have a common management team, and as Olsavsky points out, "the consumer business, if you will, is, if not the biggest, one of the largest customers of AWS." Amazon benefits greatly from owning AWS, as it drives greater efficiencies in its infrastructure costs.

On the flip side, AWS benefits because Amazon is "a large internal beta customer that tries out and uses a lot of their products and services" before they're released to the public.

The symbiotic relationship between the two businesses is something that wouldn't exist if they were separated. Amazon may find it more effective to build out its own data center instead of relying on AWS's market prices. Such a move would destroy value for both AWS and Amazon, at least in the short term. We just saw a similar thing happen between eBay and PayPal Holdings.

AWS is only one example of a service Amazon provides where it is its own biggest customer. Amazon's retail business stands as a tentpole for the company's services, which often provide much greater profit margins and offer excellent synergies.

Breaking Amazon apart destroys more value for shareholders than it creates. Even if a few big customers decide to leave AWS, the secular growth of public cloud computing means there's plenty of opportunities for Amazon's cloud unit to pursue. And with Amazon's retail arm as a customer, AWS will always have the scale needed to provide competitive pricing while still producing profits.

10 stocks we like better than Amazon
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, eBay, and PayPal Holdings. The Motley Fool has a disclosure policy.