Think AI spending is Amazon’s (NASDAQ:AMZN) biggest risk? Think again. The real time bomb is tariffs – and it’s already ticking.
Amazon hauls in over $400 billion in retail-related revenue every year. And here’s the kicker: roughly 25% of its cost of goods sold comes from China. Now layer on Trump’s renewed tariffs and suddenly you’re staring at a $6.5 billion operating income hit that could erase almost $200 billion in market cap, based on Amazon’s current 30x multiple. Tariffs will hit Amazon where it hurts most: razor-thin retail margins.
And it doesn’t stop there. If consumers balk at price hikes, Amazon’s pricing power erodes. If sellers bail, Prime loses its edge. If margins compress further – while the company pours billions into AI with no proven ROI – the entire bull case starts to wobble. We warned about this in our recent piece: Amazon Stock to Crash to $120? Tariffs are the spark. AI overspend is the fuel.
And if you’re still all-in on Amazon stock, it might be time to rethink. That’s why our High-Quality portfolio, designed to sidestep these stock-specific shocks, has outperformed the S&P 500 and achieved returns greater than 91% since inception.
Let’s unpack the damage by the numbers.
Amazon’s China Addiction: A Tariff Magnet
Amazon sells everything but it doesn’t make everything. It sources much of its inventory and enables a third-party ecosystem that’s deeply reliant on Chinese manufacturing.
- 25% of Amazon’s retail cost of goods sold comes directly from China
- Over 50% of third-party (3P) sellers on Amazon are based in China
With the tariff war escalating with China, Amazon’s cost base is now exposed in a major way.
Price Increases Are Coming – But Can Amazon Pass the Pain?
Amazon lives and dies by its value proposition. That makes it terrible at passing on cost increases. But it has to, to some degree. CEO Andy Jassy himself admitted that “Prices will likely rise” due to tariffs – a rare public concession of pricing pressure.
But let’s be clear: Amazon will eat much of these costs. Unlike niche DTC brands or retailers with premium margins, Amazon competes on price, and every dollar it fails to pass through is a direct hit to margins.
The Margin Math: How Much Damage Are We Talking?
Let’s do the math based on Amazon’s 2024 financials
- Total revenue: $638 billion
- Retail-driven revenue: Approximately $424 billion (online stores, retail stores, 3P seller services)
- Assumed gross margin on retail: 15%. Amazon does not disclose this but for comparison, Walmart has 24.9% gross margin while Costco has 12.7%. We think Amazon’s gross margins are likely to be closer to Costco given its super-focus on cost and value
- Implied retail COGS (cost of goods sold): $63.6 billion
Now assume:
- Tariffs raise retail COGS by 20% → Almost $13 Bil in added costs
- Amazon passes through 50% to customers → $6.5 Bil margin hit
- Gross margin decline → 1.5%
- Operating income hit → $6.5 Bil
- Operating margin drop → 1%
Does it look small? Think again. That’s a $200 billion decline in stock value.
Market Cap Hit > $200 Billion
Just 1% decline in operating margin reduces Amazon’s value by $200 billion based on prevailing P/EBIT multiple of almost 30x. That’s >10% of current market cap. Just double that margin hit, which is quite possible (remember reciprocal tariffs are at a ridiculous number now) and you are easily looking at 20-25% downside.
But that’s not all. Guess what? When expectations fall, multiples shrink. Amazon’s current market multiples inherently imply that investors expect margin expansion. And when that does not happen – and in fact margins go down – what do you think is going to happen? Big funds will dump Amazon, and multiples will contract. The actual downside could be much higher!
It is not outrageous to say that Amazon can fall even as low as $120. Just look at the history – market doesn’t care how good the business is. This is why we diversify away stock-specific risks with Trefis High Quality (HQ) Portfolio which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.