Amazon could be forced to spin off AWS, Oppenheimer says

Published Mon, Nov 18 20198:45 AM ESTUpdated Mon, Nov 18 201911:09 AM EST

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

Amazon, which has faced increasing antitrust pressure this year in the U.S. and European Union, may have to spin off its lucrative cloud business, Oppenheimer warned investors on Monday. Oppenheimer's note comes as Amazon protests the Pentagon choosing Microsoft for the military's "JEDI" contract, which could span a decade of cloud services and be worth as much as $10 billion. The contract marked a major win for Microsoft 's cloud business. Amazon said "the JEDI evaluation process contained clear deficiencies, errors, and unmistakable bias," a move that is unlikely to take regulatory heat off Amazon. "We believe AMZN will face increased regulatory pressures, which could eventually force AWS to split with AMZN," Oppenheimer analyst Timothy Horan said in a note to investors. Andy Jassy, CEO of Amazon Web Services, said in a June interview that the company would "follow U.S. law" and comply with regulators if forced to spin off AWS. It's the same line of thought that The Atlantic's Franklin Foer floated in a CNBC interview last month, after the writer profiled Amazon founder Jeff Bezos . People close to Bezos believe spinning off AWS "would be the obvious thing for [Bezos] to do in the face of" regulatory scrutiny, Foer said. AWS made up nearly 13% of Amazon's total revenue during the third quarter , but the cloud business saw revenue growth of 35%, its slowest rate since Amazon began reporting the number four years ago. "AWS has missed the last three quarters as top line-growth slows faster than expected, which we think is attributable to longer (and tougher) sales cycle up-market. Channel conflicts with Amazon.com (retail, logistics, healthcare, grocery) could also pressure sales to larger customers," Horan said. The tech industry at large is "in the early innings of cloud adoption," with AWS and Microsoft's Azure as the dominant players, Horan said. While he is cautious about AWS' growth, the analyst is bullish on Azure. "We have been getting more questions on margins at scale, and we think there is no difference structurally between AWS and Azure that would prohibit MSFT Azure from reaching AWS margins and possibly even higher when viewing MSFT on a consolidated basis. At this point, MSFT should continue to see strong operating leverage in its cloud business, which has been our five-year thesis," Horan said. – CNBC's Michael Bloom contributed to this report.

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.

Ivan Alvarado | Reuters

Amazon, which has faced increasing antitrust pressure this year in the U.S. and European Union, may have to spin off its lucrative cloud business, Oppenheimer warned investors on Monday.

Oppenheimer's note comes as Amazon protests the Pentagon choosing Microsoft for the military's "JEDI" contract, which could span a decade of cloud services and be worth as much as $10 billion. The contract marked a major win for Microsoft's cloud business. Amazon said "the JEDI evaluation process contained clear deficiencies, errors, and unmistakable bias," a move that is unlikely to take regulatory heat off Amazon.