How Vulnerable Is Amazon Stock to a Trade War?

AMZN - How Vulnerable Is Amazon Stock to a Trade War?

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On Monday, President Trump announced new tariffs on $200 billion worth of Chinese imports, hitting Amazon (NASDAQ:AMZN) and sending the stock lower. Apple (NASDAQ:AAPL) escaped largely unscathed this round, as consumer gadgets like the Apple Watch were spared.

The latest list includes routers, networking gear and components for computer servers. With Amazon Web Services (AWS) as the company’s primary source of profit, the prospect of higher operating costs for this division gave Amazon stock a 3.12% haircut on the day, before AMZN bounced back Tuesday.

President Trump Announces Next Round of Chinese Tariffs

On Monday, the $50 billion worth of Chinese imports already subject to tariffs as part of an escalating trade war grew significantly. Starting Sept. 24, the second round of tariffs will hit an additional $200 billion in Chinese goods brought into America. The tariff rate starts at 10% but climbs to a more punishing 25% starting Jan. 1, 2019.

The New York Times points out that the staggered timing will help to shield consumers from the full impact of the tariffs during the holiday shopping season. That would be good news for AMZN and its retail sales, except …

The products on the latest list include routers and components used to make the servers and networking gear, which are the background of data centers. That puts AWS right in the bullseye for increased operating costs.

Last quarter, AMZN reported an operating profit of $2.5 billion on revenue of $52.88 billion. That was a quarterly record for the company and more fuel for Amazon stock’s relentless climb. But $1.64 billion of that profit — about 66% — was generated by Amazon Web Services.

Amazon’s data centers use a lot of routers, servers and networking gear. With the prospect of AWS facing increased operating expenses under the newly announced round of Chinese tariffs, Amazon stock took a 3.12% loss at close on Monday, with AMZN slipping further in after-hours trading.

Companies that actually sell the products on that tariff list — like Dell — are going to be hit as well. But Amazon’s reliance on AWS to fuel its operating profit combined with sky high Amazon stock make it particularly vulnerable this round.

There Could Be More

With round one and two of the Chinese tariffs in place, the U.S. is now at the point where $250 billion worth of goods are affected. But if the trade war escalates further, it’s going to get significantly worse.

President Trump warned that if China retaliates against the latest round of tariffs, he is prepared to impose a third round that would include an additional $267 billion worth of imports. And that third round doesn’t spare consumer electronics. AAPL stock was down 2.66% on the news that a potential third round wouldn’t just impact the Apple Watch and AirPods, it would hit a wide range of the company’s products — including the iPhone.

We probably won’t get a feel for how the latest round of Chinese tariffs will impact Amazon’s AWS operations when the company reports its third-quarter earnings, since the tariff kicks in just days before the quarter wraps up. With Q4, AWS will have the 10% tariff to contend with. The real impact should show up in Q1 2019 earnings, which will show the impact of a full quarter of AWS operations facing the 25% tariff level for networking gear. That will be the real test of the trade war’s impact on Amazon stock.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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