A large portion of Amazon sellers are in China, making it vulnerable to the impact of tariffs on its e-commerce business.
Management is likely working out how to circumvent the impact by diversifying its supply chain.
It has natural protection based on the variety of its businesses.
Investors continue to be wary of the new tariff program. Even if the Trump administration's tariffs do accomplish their stated goals of eliminating bias against the U.S. and boosting U.S.-manufactured products, we won't see results immediately. In the meantime, the economy could slide, and there may be a significant negative impact that could be short- or long-term.
Billionaire Mark Cuban recently gave his take on how tariffs might affect Amazon(NASDAQ: AMZN). Spoiler alert: He doesn't think it's going to be good. Let's see why, and how investors should play this.
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Tariffs + Amazon = trouble?
On social media site Bluesky, Cuban noted that "If these tariffs stick, it's going to be ugly for Amazon, but incredible for all the American sellers."
That's a pretty blunt assessment. In the post, Cuban included a graphic from SmartScout, a company that provides data solutions for Amazon sellers; it lists revenue share for sellers in China by Amazon category. In two categories -- arts and crafts, and cellphones and accessories -- Chinese sellers account for more than half of category revenue. In another two categories -- apparel, shoes, and jewelry, and tools and home improvement -- they account for about half. In multiple other categories, they represent a large percentage of total revenue.
Those are significant stakes in Amazon's business. Third-party sellers accounted for 61% of units sold on Amazon's platform last year, the highest percentage ever, and a total of $47.5 billion in sales in the fourth quarter -- one-fourth of total company revenue. Their sales increased 9% year over year, outpacing Amazon's online stores, which reported a 7% increase in sales. This means tariffs on Chinese imports could have a huge impact on this business.
Cuban posits that while tariffs would be bad for Amazon, they would be good for U.S. sellers. While that's an optimistic take, in actuality, a large portion of what U.S. sellers are selling is likely coming from China as well. So the tariffs, perhaps indirectly, also affect these sellers, and they also impact Amazon's own online sales. In other words, the effects on the company's e-commerce business could be major.
Is there a bright side?
Amazon's executives have yet to address how they envision the effect of tariffs on its business, but you can bet the issue will take front and center when they release first-quarter earnings on Thursday. Noting how other companies are addressing the impact, I can see a number of approaches Amazon might take.
First, it's likely to tout diversifying its supply chain. Many companies are turning to other Asian countries that have a strong manufacturing infrastructure, especially Vietnam, to get around the tariffs on China. Amazon could reroute supply chains from China to another intermediate country on their way to the U.S. It might turn to more domestic manufacturers, which could help the company and its U.S. sellers bring about the intended effect of the tariffs. It's also likely to absorb some extra costs to keep customers happy and buying.
Will customers stop buying from Amazon?
Amazon has more than 200 million Prime customers. These customers count on the e-tailer to deliver their orders quickly and without hassle. Some of them might switch to physical stores if they can cut out some higher costs, but it's unlikely that a large percentage of these customers would change their shopping style unless the costs were prohibitive.
Most of the companies those customers might consider switching to would also be dealing with the same issues as Amazon, although without the issue of third-party Chinese sellers. But that may not make a difference if tariffs are being slapped on all Chinese goods, whether they come from a seller in China or the U.S., in the same way.
Amazon knows how to play the long game. To push its own agenda, it has undercut other companies in the past. If it has to take a hit to profitability to keep customers happy in the short term, it's likely to do that again. It won't lose its dominance over this issue.
Amazon is much more than e-commerce
To its benefit, Amazon has many revenue streams beyond e-commerce. Amazon Web Services (AWS) is its fastest-growing segment and will be affected less by tariffs -- although it does have exposure through the chips it provides, and now manufactures, for clients to take part in generative artificial intelligence (AI).
Its large and growing advertising business and its streaming business are also less exposed to tariffs, shielding both from an acute impact.
You can also play the long game
Whatever happens in the short term, Amazon is well positioned to survive and bounce back. As a huge and profitable company, it has the means to wait out short-term tariff shock. And if tariffs do stick and become the norm, it will integrate them into its platform like all other affected companies. Its other businesses also provide some protection right now.
At the current share price, Amazon trades at a forward price-to-earnings (P/E) ratio of 25, which is an excellent entry point for new investors. If you don't own the stock, now is a good time to buy. If you do own Amazon stock, don't make the mistake of selling at a low, when shares are poised to rebound and provide value down the line.
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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. Jennifer Saibil 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.
