Will the Trade War Cast More Than a Shadow on Amazon?
The trade war between the United States and China has affected many companies, but no one thought much of Amazon and the Chinese products it sells.
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Trading stocks and developing investing strategies don’t always happen in calm waters. While an experienced online stock broker helps people trade stocks in an easier and stress-free manner, you ultimately need to make the decisions. The trade war between the United States and China has brought in a bit of volatility to the markets, and some strong stocks have suffered.
Amazon ($AMZN) is an ecommerce giant, an empire that can rise above market trends, phenomena and developments. It’s been disrupting industries and dominating them, dealing a heavy hand to the competition. The company has a market capitalization that tops $900 billion. But the US-China trade war is just so far-reaching that even Amazon is getting impacted by it, with the risk of halting its impressive growth rate.
Amazon May Have to Increase the Prices of Goods It Sells in the US
The crux of America’s attack on Chinese trade is imposing tariff on goods imported from the eastern economic powerhouse. This has been increasing or varying ever since the trade war began, particularly with regard to the amount of goods being included as part of the tariff revisions. On the 1st of September 2019, there were further tariffs imposed, 15% on imported Chinese goods worth $112 billion. Bank of America analysts state that the risk of tariff is the greatest on the ecommerce industry since it directly affects product pricing. Cost-effective pricing is one of the major attractions of ecommerce. But if that gets compromised and prices rise, the attractiveness factor isn’t strong enough.
The Bank of America report, as quoted by Investopedia, stated that Amazon would have to raise the prices of the goods it sells in the US by an average rate of 2.1% to 2.6%, so that the impact of these tariffs does not reduce the profitability for Amazon.
Contribution of Chinese Imports to Amazon’s Repository
According to analysts at the Bank of America, 20% of first-party sales by Amazon comprise Chinese imports. These are sales directly made by Amazon to its customers. 25% of Amazon’s third-party sales are also made up of Chinese imports. These are sales by merchants selling through the Amazon website, providing commissions for Amazon.
Raising Prices Is Inevitable
Now the Bank of America reckons that prices for first-party sales of products from China would need to rise by 2.1% so as to not affect Amazon’s profit margin. When it comes to third-party sales, Amazon would need to raise prices by 2.6% on average to maintain profitability. There is always the risk of reduced demand when you raise prices though. But there could be some factors that work in favor of Amazon.
Factors In Favor of Amazon
Amazon isn’t obviously the only retailer to be affected by the tariffs. The other retailers would also bring about price rises and that could work in favor of Amazon since it has a much greater reputation, popularity and variety of products.
Now Amazon also has products that are not affected by the tariffs. Not all Chinese goods have tariffs, and there are imports from other countries and domestically manufactured products that are not directly affected by what all goes on between the US and China. The demand for these products on Amazon would increase since they would continue to be priced competitively. Almost every Chinese-made product would have an alternative, and those products could be scooped up by customers, owing to their lesser cost.
Further Tariff Hikes Could Be Troublesome
So Amazon is probably not in as bad a situation as would seem initially. But if the tariffs rise again, we need to see how customers would react to that since Amazon would again have to raise the cost of Chinese-imported products. If the two countries manage to settle their differences and sign a deal though, Bank of America analysts reckon the stock could jump.
As of September 12, 2019, Amazon shares have risen a further 24%. The company’s shares are continuing to outperform the market though not quite as much as the previous years. Looking at the past decade though, Amazon stock has grown a massive 2,220%!
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