2 Reasons to Avoid Amazon Stock as Tariffs Escalate

While President Donald Trump paused most of the tariffs that went into effect last week, tariffs on Chinese goods not only remain in place but are escalating, as I write this. Most companies are exposed to tariffs on Chinese goods in one way or another, either because they source products and supplies from China, or because they're susceptible to weakening consumer and business spending as economic uncertainty ramps up.

Amazon (NASDAQ: AMZN) is facing multiple headwinds from the tariffs on Chinese products, and the retail and cloud giant may be more exposed than many of its peers. Here are two reasons why staying away from Amazon stock might be a good idea.

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1. Heavy dependence on Chinese sellers

Around 62% of all items sold through Amazon in the fourth quarter of 2024 came from third-party sellers. Not only does Amazon's third-party marketplace greatly expand the variety of items available to shoppers, but it also generates copious fees. Amazon's third-party seller services produced revenue of $47.5 billion in the fourth quarter, more than AWS and Amazon Prime combined.

The tariffs on Chinese imports enacted by the Trump administration, which sit at 145% as of Friday morning, could be a major problem for Amazon's lucrative third-party marketplace business. According to Marketplace Pulse, China-based sellers on Amazon account for more than 50% of third-party sales. That's up dramatically from less than 20% in 2016.

Chinese sellers on Amazon will have no choice but to raise prices or exit the market, and U.S. sellers who source products from China will face the same options. The tariffs are high enough that significant price increases would be necessary for sellers to preserve profit margins.

This situation is a double whammy for Amazon's retail business. First, sellers fleeing the platform due to tariffs would reduce the variety of products available on Amazon and could drive customers to seek alternatives. That could hurt sales of first-party products, advertising revenue, and Prime membership fees. Second, third-party seller services revenue could take a big hit as fewer sellers and lower volumes collide.

This cascade of negative impacts on Amazon's retail business could put serious pressure on the company's results.

2. Slowing IT spending could hit AWS

While AWS is exposed to tariffs directly in the form of higher costs for server equipment and other materials necessary to build and maintain data centers, the bigger impact may be a potential slowdown in IT spending. Mission-critical spending from AWS customers isn't going away, but a slowdown in new workload growth and an effort to reduce existing spending could both be in the cards.

In late 2022, AWS suffered from slowing growth as customers made cost cutting a priority, and that could happen again as businesses look for ways to save money. An estimated 21% of enterprise cloud infrastructure spend is wasted on underutilized resources, according to AI software delivery platform Harness. As businesses grapple with economic uncertainty, finding and eliminating that wasted spending could become a top priority, to the detriment of AWS revenue.

A risky stock

A run-of-the-mill recession would sting Amazon's retail and cloud businesses, but if a recession strikes this year, it will be anything but ordinary. Consumers and businesses pulling back on spending will be combined with a breakdown of Amazon's marketplace business, assuming the tariffs on Chinese goods remain in place. Fewer sellers, less variety, and higher prices on Amazon's third-party marketplace would lower seller services revenue, hurt advertising revenue, and potentially lead to some Prime cancellations.

Of course, the tariff situation could change tomorrow given how erratic these developments have been. But given how things stand today, Amazon stock looks like a risky bet.

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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. Timothy Green 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.