Retail funds the cloud, and the market only prices one of them

It traded at 248.27 this morning, -1.29% on the session. This is a company where the consolidated numbers actively obscure the business, which is unusual and worth exploiting.

Why consolidated figures mislead here

There is a retail operation with thin margins and enormous revenue, an infrastructure business with high margins and much less revenue, and an advertising business growing quickly inside the retail one.

Consolidated margin is an average of things that have nothing to do with each other. It goes up and down for reasons of mix that say nothing about whether any individual business is improving.

Valuing the pieces

• Infrastructure, valued against comparable enterprise software and infrastructure businesses
• Advertising, valued against advertising businesses, where the margins genuinely belong
• Retail, valued as retail, which is to say not very generously
• The remainder, which includes the logistics network and is worth arguing about

Do that honestly and the sum tends to sit close to or above the market value, with the retail operation contributing very little of it. Which is another way of saying the market is paying for the infrastructure and advertising businesses and taking the largest logistics network in the world as a bonus.

The counterargument, fairly stated

The retail operation is not free. It consumes capital continuously, and a low-margin business that requires ongoing investment can be worth less than nothing in a sum of the parts. Anyone doing this exercise should be willing to assign it a negative value and see whether the case survives.

A sum of the parts that only works when every part is assigned a friendly multiple is not analysis, it is decoration.

Where I am

Long, on the basis that the case survives being unkind to the retail segment. The risk is capital intensity rising without the returns following, which is the way this argument has failed before.