Amazon is the third largest advertising company after Google and Meta. Its ad revenue is $32B (and growing fast, the run rate is $40B). That is half the revenue of AWS, which is worth 70% of Amazon's market cap. The inescapable conclusion is that Amazon's advertising is worth the remaining 30% of Amazon's market cap and Amazon's e-commerce arm is deemed worthless by Wall Street, its only purpose being to support the advertising business, just what Google Search is to Alphabet.
Think on that for a moment. The other inescapable conclusion is that whenever the quality of the shopping experience on Amazon and the needs of Amazon's advertising business clash, advertising will win (just as it has on Google). That's an even more foregone conclusion since Andy Jassy took on the top job, he's from AWS and owes no special allegiance to the historical e-commerce business.
> The other inescapable conclusion is that whenever the quality of the shopping experience on Amazon and the needs of Amazon's advertising business clash, advertising will win (just as it has on Google).
Saying that the e-commerce arm is worthless isn't really the right way to think about it - the ads business only exists to due the e-commerce product. Both Amazon and Google are well aware that their ad revenues depend on their having users, who will ultimately leave if the product (ecommerce and search, respectively) isn't compelling. Both of them know that long-term success requires them to prioritize user experience.
Do they make bad decisions, either due to misaligned incentives internally or due to simply making mistakes? Undoubtedly. But it's also worth considering that they probably get the tradeoff right a lot of the time and most people simply aren't bothered by ads nearly as much as you'd like them to be.
Obviously Amazon's e-commerce division is not worthless, but it often happens that conglomerates are worth less than the sum of their parts. Many activist investors have been calling to split AWS from Amazon.com, but the ad business can't be split from the store that brings it eyeballs.
At least with e-commerce and advertising it's clear they're worth more together. Without advertising the profits would be thin, and without e-commerce the advertising couldn't exist.
> it's also worth considering that they probably get the tradeoff right a lot of the time
How did we arrive at this conclusion? No argument or evidence was put forward!
My persobal experience on both Google and Amazon has declined to the point where I now prefer aliexpress - most of the time its the exact same item but cheaper
> Of course user experience is prioritized: below advertiser experience.
I’m not sure how much you’re into the Google ads world, but they have screwed the pooch on that recently as well (e.g., by gimping “exact match” keywords).
Hard to know what fmajid means - although mentioning revenue is a serious black flag. Google’s search is a cost-centre and their advertising is a profit-centre. You could say Amazon is similar because in 2021 AWS made all the income and e-commerce made zero income[1].
I would be interested to see an analysis of income per business sector*, including their advertising sector, for Amazon. fmajid would need that information to be able to make the conclusions they drew.
From article: “After selling $31 billion in ads last year, Amazon became the third-largest online ad company in the United States”
Hard to know what this means, since we can’t know how much it “cost” Amazon for those ads (especially the cost of consumer dissatisfaction as the article mentions, and what is opportunity-cost?)
* and ideally assets per sector as well, plus a metric for internal capital reinvestment (VC style).
Excellent perspective. Organisations are similar to individual human minds in structure, but scaled. They will make mistakes, just like people do, but also correct themselves over the long haul so that they can survive.
I actually wouldn't be surprised if I'm misunderstanding something and you're right, but can I ask where you got these numbers?
Edit: On second read I realized the source I sent was misleading – the title talks about annual revenue, but hidden in the text there's a note saying that sub-headings actually show quarterly revenue. I'm still not sure about AWS-to-sales ratio, but my apologies for earlier confusion.
Yea no I'm also left scratching my head. I've never heard of a methodology to attribute market cap portions to business units; eager to hear some clarification too.
It is a well-established concept called https://www.investopedia.com/terms/s/sumofpartsvaluation.asp. A company's value is estimated on net present value (npv) of its projected, discounted future cash flows. If a company has a large, stable subsidiary that is growing slowly but is cash flow positive and a very fast growing but money losing subsidiary, it makes more sense to value parent company as if both subsidiaries were separate companies than the average of the two. A famous example was AWS within Amazon before it became noticeable in the bottom and top lines.
Further, it’s often applied backwards. Some financial engineering self proclaimed wizard will claim “x+y+z=a and the stock is trading at b, and a>>b, therefore the conglomerate discount is too large so we can earn risk free profit (aka arbitrage) by breaking this company up and publicly listing x,y, and z as independent units”. See: Xerox, for example.
Typically in mergers, you see accretion due to the removal of duplicate functions on the cost side (you don’t need two HR departments for example), but sometimes you get negative credit if you’re a too big / too opaque / too confusing.
Yes I understand NPV and DCF but not OPs point. The eCommerce arm makes a lot of money so I don’t understand how you could come to the conclusion that its present value is zero.
I see what you're saying. The logic to the OP's point is "If AWS were to be spun out, on its own it should be worth 12x revenue, or $750B. If the Amazon web business were to be spun out on its own, it should be worth 6x revenue or $250B. Since those add up to $1T and the market cap of AMZN is $950B, the market assigns a -50B valuation to the rest of the company." I agree it's flawed logic. The market may just disagree with someone's sum-of-parts. It maybe conglomerate discount. It may be that the market is undervaluing AMZN, too. I don't think that many people would disagree AMZN's ecommerce division is valuable.
Where are you getting this from? I cannot for the life of me find profits by business unit. I have glanced over the 2021 Annual Report but don't have to analyze it. If you have a source I would appreciate it.
This is done all the time when pieces of businesses are bought and sold. It gets a little complex when the businesses are related (like Amazon Advertising and e-commerce, as opposed to Amazon e-commerce and AWS which are more fully independent of each other).
I understand approximating present value by discounting cash flows but not how you would come to the conclusion that the eCommerce business is valued at zero because the sum of AWS and ads make the total of the market cap.
For AWS, 3rd quarter revenues alone were $20B, so $80B annual. I don't know where that other source of yours finds $17B, unless they are talking profit.
It’s an accounting trick. Retail is profitable via ads and more. Retail also pays huge infrastructure sums to aws. It’s all a trick to make amazon stock pump
This reminds me that as far as wall street is concerned, it is actually an afterthought that airlines operate airplanes, all the money is in the credit cards.
I think it was the CEO of American Airlines, which owned the Sabre computer reservation system at the time, that if he had to choose between keeping the airline or the CRS, he'd go for the latter. In any event. Sabre was spun out in 2000.
Making and selling TVs is similarly an afterthought for TV manufacturers now that smart TVs have been commodified, the money is in the analytics platforms.
Think on that for a moment. The other inescapable conclusion is that whenever the quality of the shopping experience on Amazon and the needs of Amazon's advertising business clash, advertising will win (just as it has on Google). That's an even more foregone conclusion since Andy Jassy took on the top job, he's from AWS and owes no special allegiance to the historical e-commerce business.