Few companies are as harmed by the escalating trade war between the U.S. and China as Amazon (AMZN +0.34%). Its massive e-commerce platform sources many goods from China, which will see a dramatic price increase as the U.S. tariff rate on goods from there now sits at 145% -- at least, for the moment. However, that rate could easily change, as the two sides have not yet backed down.
While some may think that Amazon will be a casualty in this trade war, other facts dispute this claim. As a result, I think using the weakness on the tariff fears to buy Amazon stock is the smart move, as there are far more factors to Amazon than just its e-commerce business.
Amazon's e-commerce platform isn't the primary reason to invest in the stock
Let's address the elephant in the room: Of more than 1,000 third-party sellers surveyed by ECDB, 71% said that they sourced at least one product from China. This means that there are a ton of goods on Amazon's e-commerce platform that come from China, which could see a huge price hike shortly. In return, higher prices could cause consumers to spend less, hurting Amazon's total e-commerce sales.
While this is less than ideal, it's still not as big of a deal as some investors make it out to be. The reason? Most of Amazon's profits don't come from its e-commerce store. While a large chunk of revenue comes from Amazon's online store and third-party seller services, there isn't much profit from these areas.
Subscription and ad services are a key part of Amazon's commerce division, and they raise its overall profit margins, making it hard to pinpoint exactly what Amazon's commerce profit margins are. However, if you look at a retailer like Walmart (WMT +2.15%), its profit margins are consistently below 3%. In contrast, subscription services are likely a very high-margin business, as is advertising.
Meanwhile, advertising-centric companies like Meta Platforms (META +1.81%) are delivering profit margins of nearly 40%, which means ad revenue produces far more profit than commerce revenue.
NASDAQ: AMZN
Key Data Points
In Q4, Amazon's online stores and third-party seller services totaled $123.1 billion in revenue, while ad and subscription services totaled $28.8 billion. If the commerce subsection posted a 3% profit margin and the ad and subscription services posted a 35% margin, the commerce subsection would have produced $3.7 billion in profits while the ad and subscription service produced $10 billion.
While these are estimated figures, they give investors a good idea of how unaffected Amazon's business will be overall if its commerce revenue struggles to grow. This is a key fact, as Amazon may see its overall revenue struggle to grow, but profits will likely continue growing. Additionally, Amazon's most important segment is relatively unharmed by tariffs.
AWS is a critical part of Amazon's profit picture
Another important part of Amazon’s business is its cloud computing division, Amazon Web Services; the company specifically breaks out the figures for that division, so we know the margins. AWS is a huge component of Amazon and displays an even larger profit share compared to the revenue it brings in. In 2024, AWS accounted for 58% of Amazon's operating profit margin despite accounting for 17% of sales.
Cloud computing's tailwinds aren't going away as they benefit from two trends. The first is the general movement from workloads on local servers to those on the cloud. Many companies are finding this is a far more efficient way to run workstations, as they don't have to worry about maintaining the servers once they buy them. Additionally, it's easy to scale usage up or down, which allows them to be more flexible, where that ability is lost if you purchase your own server.
Another tailwind to cloud computing is artificial intelligence (AI). Most companies don't have the computing power necessary to run AI workloads and can't justify spending millions of dollars on a supercomputer to develop their own models. Instead, training them on Amazon's cutting-edge servers is more cost-effective.
This is a long-term growth trend for Amazon, and there isn't a ton that tariffs can do to disrupt this movement. Growth from AWS may or may not cancel out any revenue difficulties Amazon experiences on its commerce side, but with Amazon's growing ad business and cloud computing offering, Amazon's profits will likely continue growing at a rapid pace.
As a result, I think Amazon stock is an excellent buy here, as most of the market is focusing on the wrong metric.
