Jim Cramer doesn't want Amazon broken up into smaller companies — here's why

Published Tue, Jul 9 20244:03 PM EDT

An Amazon breakup could deliver a short-term bump for investors, but keeping the company together will deliver bigger gains over the long haul. "I don't want it broken up," Jim Cramer said Tuesday during the Club's Morning Meeting . "But the breakup numbers are substantially better than where the current stock is." With regulatory scrutiny of Amazon and all of Big Tech in Washington, Jefferies conducted a sum-of-the-parts (SOTP) analysis and found that nearly 70% of Amazon's enterprise value comes from its Amazon Web Services cloud and fast-growing advertising business. Core retail accounts for just over 25.5% of EV. Subscription services, physical stores, and some other ancillary things make up the rest. The Jefferies analysts used their SOTP to justify raising their Amazon price target to $235 per share from $225. That would represent an 18% upside to Monday's close. They think AWS accounts for $96 of the new PT, with advertising at $68. So, together that's $164. They see core retail at $60. That may seem backward because retail makes up roughly 60% of total revenue and AWS and advertising together are only about 26%. But, the SOTP analysis looks forward, and Jefferies thinks the cloud and ads are better engines of future growth than retail. It's why they estimate a cheaper 2025 EV to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 11 times for retail and more expensive multiples in the low 20s for AWS and ads. Investors are willing to pay more for stocks with higher growth prospects, and that's what this exercise shows. AMZN YTD mountain Amazon YTD While Jefferies makes a strong case that higher value in AWS and advertising are being tied to the less valuable retail operations, we oppose a breakup. That's because it would disrupt Amazon's flywheel of businesses that work better together than apart thanks to how the company aggregates and analyzes customer data. Amazon has arguably created the most powerful data collection machine in the world, and shareholders don't want that to change. Think about it: Amazon tracks what customers buy, what they watch on Prime Video, what they listen to on Amazon Music, the books they download, and the groceries they buy at Amazon-owned Whole Foods. Amazon also gathers data from shipping logistics, Alexa requests, and even home security given its ownership of the Ring and Blink camera companies. If Amazon's businesses were broken apart into individual companies, that could hamper data collection and impact the company's full understanding of users' consumption habits. That, in turn, could negatively impact the company's ability to offer best-in-class services with user-targeted offerings. We believe the colossal amount of customer data collected is how Amazon maintains its dominance from the enterprise to the consumer, which gives it the most upside. We would be concerned that a separation could limit its long-term potential. Amazon shares hit record highs this week. They have rallied more than 31.5% year to date. We think it can go higher. We increased our Amazon price target on Tuesday to $220 per share from $200 on the strength of its core businesses. In recognition of its rally, we reiterated our 2 rating — meaning we would still wait for a pullback before buying. (Jim Cramer's Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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