Amazon News Flash- AWS Worth $100B in 2018!

February 11, 2013

Terrapin Note- Apparently pulling out all the stops to support a flagging share price and newly minted $335 price targets,  it appears that sell side focus is shifting to the "hidden" value of AWS.  The $100B comes from using a 6X revenue multiple on 2018 revenue of $16.5B or so, implying some pretty significant growth from as estimated $2B in 2012.  Absent from this discussion of course is any estimate of current or forecasted profitability, with AWS widely assumed to be losing some to a lot of money, we wonder how the numbers would stand up in an S1.  With outages every other week, competitors popping up everywhere and major customers taking infrastructure in house for strategic reasons the whole narrative seems slightly aggressive.  It is in fact reminiscent of the "AMZN will have 10% of all global commerce by 2030" top line narrative previously used to support the shares two years ago, and the desperation implicit in the assumptions is just as telling.

Using extremely generous calculations for the retail business (5% operating margins on $70B in revenue fully taxed and valued at 20X EPS) we derive a current value for AMZNs "other" businesses, primarily AWS, of around $15B which seems aggressive in itself for $2B in unprofitable revenue.

Amazon Seen Spinning Off Cloud Computing Unit AWS

By Reinhardt Krause, Investor's Business Daily

Posted 11:24 AM ET

In a report on the cloud industry released Monday, Oppenheimer analyst Tim Horan says Amazon's cloud computing unit would be better off as a publicly traded subsidiary.

"We believe an ultimate spinoff of AWS is inevitable due to its channel conflicts and the need to gain scale," Horan wrote. " We see the business as extremely valuable on a stand-alone basis, possibly even operating as a REIT (real estate investment trust).

"To date, public cloud users, including online retailers, have had few alternatives when utilizing the cloud, other than to fund one of its biggest competitors. New competition will change the dynamic, and with more credible options from which to choose, an increase in the number of defections and/or a loss or pause in market share will pressure Amazon to create two separate companies that are more horizontally segmented."

Horan estimates AWS' 2012 revenue at $2.1 billion, up 77%. He expected revenue of $10 billion in 2016, representing 7% of Amazon's total revenue.

Horan uses Rackspace Hosting (RAX), Amazon's top rival in the infrastructure-as-a-service (IaaS) market, as a valuation guide.

"Rackspace has a much smaller presence in public cloud at about $300 million of revenue in 2012, and $1.3 billion overall," Horan wrote. "If we assign a 6x sales multiple to AWS, consistent with Rackspace, this would imply AWS would be worth $101 billion in 2018 ... ."

Cloud computing investors might have other opportunities. In another recent report, Canaccord Genuity analyst Greg Miller says Softlayer, also an IaaS player, is mulling an initial public offering.

SoftLayer is owned by a private equity firm, GI Partners. In 2010, GI Partners combined two companies, Softlayer and IT hosting firm The Planet.

Dallas-based Softlayer has 13 U.S. data centers. It had $335 million in 2011 revenue.

Asked about a possible IPO, Softlayer spokesman Jordan Pennington said via email: "It is company policy not to comment on rumor or speculation."

AWS is by far the biggest provider of IaaS, where customers rent computer servers and data storage in remote data centers that users access via the Internet. Customers pay IaaS service providers just pennies an hour per server.

\Amazon shares were down 1% in early trading Monday.



R