Amazon Faces $50 Billion to $100 Billion EBIT Hit from Tariffs

Amazon, the global e-commerce giant, is facing a significant challenge as a tariff storm looms over its operations. According to goldman sachs, the imposition of tariffs could result in a substantial impact on Amazon's earnings before interest and taxes (EBIT), with potential annual losses ranging from $50 billion to $100 billion. This estimate is based on a comprehensive analysis of various factors, including the extent of cost increases due to tariffs, the degree to which prices can be raised, and the elasticity of demand for Amazon's products.

The primary concern revolves around Amazon's first-party (1P) business, where the company sells products directly to consumers. This segment is particularly vulnerable to tariffs because it involves the importation of goods from overseas manufacturers. The increased costs associated with tariffs could significantly erode the profitability of this business unit, potentially leading to a substantial reduction in annual profits.

Goldman Sachs estimates that Amazon's 1P business could face a significant increase in costs due to tariffs. The company's goods cost approximately 74% of its online store revenue, with the U.S. market accounting for about 60% of Amazon's global merchandise volume (GMV). Additionally, about 35% of the cost of 1P goods in the U.S. comes from China. Considering the varying tariff rates across different regions, Goldman Sachs predicts that Amazon's U.S. goods cost could rise by 15% to 20%, and its global goods cost could increase by 9% to 12% due to the tariff policies announced on April 2.

However, Goldman Sachs points out that amazon has several strategies to mitigate the impact of these tariffs. The company can negotiate with suppliers to reduce the pressure of increased costs, adjust its product mix to focus on low-tariff or domestically sourced goods, or raise product prices to partially offset the increased costs. For instance, under the assumption of a 26% product profit margin, a 20% increase in product costs would require a 15% price increase to maintain profit margins.

Historical data from 2018 to 2019, during the first round of tariffs implemented by the Trump administration, shows that Amazon's global merchandise profit margins remained relatively stable. This indicates that the company has some capacity to manage cost increases. However, if consumers are sensitive to price increases, leading to a decrease in demand, this could further impact Amazon's profits.

Considering various factors, Goldman Sachs estimates that tariffs could affect Amazon's annual EBIT by $50 billion to $100 billion. The final outcome will depend on multiple variables, including the extent of cost increases due to tariffs and their mitigation, the degree to which prices can be raised, and the elasticity of demand for Amazon's products.