Tariffs will raise prices or disrupt inventory for many products sold on Amazon.
Amazon's core business model should remain intact, but it will take time to adjust if tariffs persist.
Investors can look to Amazon's balance sheet and other business units for stability.
Trade tensions between the U.S. and China are threatening to disrupt spending by American consumers. Retailers heavily depend on imported Chinese goods, which could skyrocket in price amid tariffs if the two countries fail to negotiate and reach a trade deal soon.
According to research by The Motley Fool, tariffs could raise prices on numerous types of goods, including electronics, textiles, leather products, and wearable apparel. Amazon(NASDAQ: AMZN), the dominant e-commerce company in the U.S., could be one of the hardest hit.
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Should investors be worried about Amazon, which has been one of the most successful stocks in history? Here is what you need to know.
The tariff impact is imminent, and Amazon will feel it
Amazon has a tremendous 40% market share of e-commerce in the U.S. The company is famous, in part, for its low prices, and selling Chinese goods is one of the reasons for this fame. According to Statista, about 71% of the items sold on Amazon originate from China.
Tariffs have been in the news for weeks, but consumers will soon begin to feel the impact. Suppliers will start raising their prices on tariffed goods as they replenish their inventories. Other suppliers may have delayed or cancelled backorders to try to wait out the tariff situation. Reports indicate that container traffic of imported goods has sharply declined.
In other words, there could also be product shortages, which can also drive prices up. Amazon's e-commerce sales will likely take a hit if products are out of stock or higher prices deter consumers.
Should investors worry? Amazon will pivot
Ideally, the U.S. and China will work out their trade differences. However, the two countries are still posturing. Amazon will likely experience a short-term impact from tariffs, at the very least. However, investors must understand the distinction between a minor injury and a potentially fatal wound.
Amazon is ultimately a marketplace. The company connects buyers with sellers. I don't see Amazon's buyers going anywhere. Not only are other retailers facing the same challenges, but Amazon Prime, its popular subscription service, also includes various other perks and services that I expect will dissuade consumers from cancelling their Prime memberships due to tariffs.
If tariffs become permanent, suppliers will adjust. It may take time, but new supply chains will form, or sellers who cannot compete due to tariffs will lose business to others with lower prices. Tariffs may dent consumer spending patterns, but they won't change the fact that Amazon is the de facto e-commerce destination for most Americans.
Stress-testing Amazon's business
To be clear, Amazon is capable of enduring, within reasonable scenarios, the short-term pain of an e-commerce slowdown. When the COVID-19 pandemic disrupted global supply chains, Amazon's cash flow from business operations declined by more than 40%. That's not ideal, but Amazon never approached losing money or any meaningful financial risk.
Now, suppose the tariffs hit Amazon's business even harder, causing the company to lose money or, at the very least, burn cash. Amazon is sitting on $101 billion in cash and has very little debt, with a leverage ratio of just 0.45 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). Additionally, tariffs probably won't dramatically affect its cloud computing business, which is where Amazon makes the lion's share of its operating profits and has significant growth tailwinds ahead as artificial intelligence (AI) drives higher cloud usage.
Tariffs create a more challenging business climate, but it's hard to see a situation where Amazon is in deep trouble. Again, Amazon may get bruised, but it probably won't break.
Worry? Why the tariff tumble is a buying opportunity instead
That hasn't prevented market volatility and tariff drama from weighing on Amazon's stock, which is down 25% from its record high set earlier this year. Analysts have also steadily lowered their long-term earnings growth outlook from an annualized rate of 24% in the fall to about 19% now. But the stock is attractive, even with a lower anticipated growth rate. The shares trade at 28 times 2025 earnings estimates, an attractive price-to-earnings ratio for a business with that expected long-term earnings growth.
As long as Amazon shoppers maintain their Prime memberships and the cloud business continues to perform, Amazon will be well positioned to navigate any short-term harm that tariffs might cause. Investors may want to consider scooping up shares to hold. There's a good chance the business and stock will see brighter days again.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
