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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

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.

throwaway5752 4y ago
It is a well-established concept called https://www.investopedia.com/terms/s/sumofpartsvaluation.asp 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.
- texasbigdata 4y ago
  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.
- arcturus17 4y ago
  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.
  - diogofranco 4y ago
    It made less than no money recently. You might be thinking of revenue.
    - arcturus17 4y ago
      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.
  - throwaway5752 4y ago
    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.
spoonjim 4y ago
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).
- arcturus17 4y ago
  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.
  - spoonjim 4y ago
    You don’t, that is an inaccurate conclusion because the ads business would not exist without the e-commerce business.
fmajid 4y ago
When Amazon had a market cap of $1.7T, $1T of that was from AWS. I don't remember what the source was for the estimate.
- a123b456c 4y ago
  LMGTFY: https://www.google.com/amp/s/247wallst.com/technology-3/2022/05/03/amazon-web-services-is-worth-1-trillion/amp/ https://www.google.com/amp/s/247wallst.com/technology-3/2022... Not an authoritative source. No rationale given.

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.

throwaway5752 4y ago

It is a well-established concept called https://www.investopedia.com/terms/s/sumofpartsvaluation.asp 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.

texasbigdata 4y ago
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.
arcturus17 4y ago
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.
- diogofranco 4y ago
  It made less than no money recently. You might be thinking of revenue.
  - arcturus17 4y ago
    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.
- throwaway5752 4y ago
  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.

spoonjim 4y ago

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).

arcturus17 4y ago
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.
- spoonjim 4y ago
  You don’t, that is an inaccurate conclusion because the ads business would not exist without the e-commerce business.

fmajid 4y ago

When Amazon had a market cap of $1.7T, $1T of that was from AWS. I don't remember what the source was for the estimate.

a123b456c 4y ago
LMGTFY: https://www.google.com/amp/s/247wallst.com/technology-3/2022/05/03/amazon-web-services-is-worth-1-trillion/amp/ https://www.google.com/amp/s/247wallst.com/technology-3/2022... Not an authoritative source. No rationale given.