Amazon should split its retail and cloud computing businesses: Citi

Ivan Alvarado | Reuters

The logo of Amazon Web Services (AWS) is seen during the 4th annual America Digital Latin American Congress of Business and Technology in Santiago, Chile, September 5, 2018. 

Citi Research believes Amazon should split itself up to reduce the risk of regulation and increase shareholder value.

The firm reiterated its buy rating for Amazon shares, saying the technology giant is its “top pick” in the internet industry.

“There has been greater noise of late regarding the desire to investigate and potentially regulate the company,” analyst Mark May said in a note to clients Monday. “By separating the retail and AWS businesses, Amazon could minimize or avoid the risk of increased regulatory pressure.”

Amazon shares are down 0.6 percent in Monday’s premarket session.

The analyst noted reports President Donald Trump is “obsessed” with Amazon and that his administration could potentially go after the company on antitrust grounds. He added the internet giant is getting more scrutiny due to its roughly $1 trillion market valuation and CEO Jeff Bezos’ status as the richest person in the world.

After a separation, May said Amazon’s retail business will be worth materially less than its cloud computing company. He estimates a roughly $400 billion enterprise value for the company’s retail segment versus $600 billion for Amazon Web Services.

“A smaller market cap Amazon retail business may bring (slightly) less attention to its market size and dominance,” he said.

May reaffirmed his $2,250 price target for Amazon shares, representing 14 percent upside to Friday’s close.

Here are the seven other reasons May believes Amazon should separate its retail and Amazon Web Services businesses:

1. “To better align stock-based compensation/incentives.”
2. “To plan for Bezos’ succession and to promote and retain key executives.”
3. “To take advantage of the HQ2 planning.”
4. “To avoid/minimize conflicts of interest.”
5. “To improve shareholder selection.”
6. “To achieve a better valuation as a pure play.”
7. “To provide a more attractive M&A currency for potential acquisitions.”

Amazon shares are significantly outperforming the market this year. Its shares are up 68.5 percent year to date through Friday versus the S&P 500’s 8.7 percent gain.

The company did not immediately respond to a request for comment.