Value of Amazon's AWS trumps Kindle franchise, says analyst

Amazon's retail business is a massive operation that may be worth $108 billion or more if it becomes the next-generation Wal-Mart, but Amazon Web Services may be the real home run and even be more valuable than the Kindle franchise.

Those are the high-level takeaways from Morgan Stanley analyst Scott Devitt. Devitt took a so-called sum-of-the-parts look at Amazon. He noted that Amazon may be near fair value given its profit margins, but has a lot of potential to grow. Here's his valuation on Amazon's parts:

• Amazon's retail business is worth $108 billion.
• AWS is worth $25 billion.
• The Kindle franchise is worth $23 billion.

The real win for Amazon may be AWS, which Devitt argues could be a top five IT vendor. AWS, which has better margins than anything Amazon does, could offset lower retail margins. Devitt noted that Amazon's paid unit growth on its retail business is slowing and operating metrics need to improve soon.

Regarding AWS, Devitt said:

Incumbent competitors can compete on performance, but very few can compete on scale – in the long run, we think scale wins because AWS performance will catch up once pricing comes down but barriers to scale are more sustainable. Hardware companies are currently most at risk (server growth has already turned negative); however, the level of enterprise workload migration to the cloud and the degree to which the cloud spurs new workload growth will determine the disruption created by AWS. We continue to believe that the combination of a compelling value proposition for customers and a disruptive model for existing IT vendors will allow AWS to grow from $2B in revenue in 2012 to +$24B by 2022.

Devitt predicted that AWS' operating margin is 10 percent, well ahead of retail.

As for the Kindle franchise, Devitt valued it at $23 billion because it allows Amazon to invest in emerging markets, new fulfillment centers, video content and lower prices. Devitt's calculations to value the Kindle business is based on an average revenue of hardware players such as Dell and HP for the actual device and a multiple for services businesses like Netflix and Pandora for the content delivery.

Bottom line: AWS is in investment mode today, but could have the largest impact on profits. The costs have already been sunk into the technology and development line. Once that infrastructure is in place---and benefits retail and Kindle---AWS flows to the bottom line.