Amazon is better prepared for the trade war than investors think

This is the case for Amazon.com and its stable of businesses. These include a cloud-computing operation, a streaming platform and an online retail business with a globe-spanning supply chain and hundreds of millions of customers.

Amazon’s retail business is particularly affected by the escalating trade battle with China, which currently includes a 145% tariff on imports to the U.S. Around 25% of products Amazon directly sells originate in China, Morgan Stanley estimates. And more than half of Amazon’s sales last year were in North America.

But the size of that global operation gives it options many competitors lack.

The company’s large logistics footprint and relationships with global suppliers mean it can move inventory and production to countries not as hard hit by tariffs. The company canceled some vendor orders from China after the tariffs went into effect, a prelude, potentially, to a geographic shift.

Amazon’s heft also gives it leverage to squeeze suppliers and keep prices from getting out of hand. That could open the door for Amazon to gain market share, Truist analyst Youssef Squali said in a note.

The company also used its sizable financial muscle to buy up inventory strategically in advance of the tariffs, Chief Executive Andy Jassy said in an interview with CNBC last week.

Amazon’s stock has had a rocky ride since tariffs on China went up on April 2. It is down 12% since that day’s market close and now trades at around 26 times forward earnings—its premium to the S&P 500’s multiple is at its lowest in a decade. The stock was near 38 times forward earnings just before tariffs hit.

Many of the small and midsize businesses that use Amazon’s storefront to sell their wares manufacture in China and export to buyers in the U.S.

That suggests considerable stress is already baked into Amazon’s price, even more than some competitors who appear equally, if not more, vulnerable.

For example, Amazon’s multiple is around a 23% discount to that of Walmart, according to FactSet data. The traditional retail titan last week reaffirmed its quarterly revenue guidance despite the new tariffs, also a testament in part to its size. It has also been building up its own e-commerce business to better compete with Amazon.

Not that there won’t be pain. The small and midsize businesses that use Amazon’s storefront to sell their wares could hurt Amazon most. Many of those businesses manufacture in China and export to buyers in the U.S.

They don’t have large margins to absorb higher costs, nor are many able to move production and inventory around the world. Some may end up raising prices. Others may go out of business.

And those businesses are important to Amazon’s bottom line. More than 60% of goods sold on Amazon.com are from third-party vendors, and the company drew in about $156 billion from charging them fees last year. Operating margins from third-party sellers have historically run at about 20%, versus a low single-digit amount for direct sales, analysts estimate.

If their prices rise and sales decelerate—post-tariffs, Morgan Stanley expects they’ll slow to 6% growth this year from 11% last year. That could take an outsize bite out of Amazon’s profit.

A downbeat consumer is another risk for Amazon. Americans expect prices to increase because of tariffs, and many are making big purchases and stocking up on staples ahead of a souring outlook.

Yet even in a strained economy, people need to buy things. And consumers tend to be more price-sensitive in times of high inflation and slowing economic growth.

Amazon has a solution for that: its Everyday Essentials business where revenue has already been accelerating. That bucket of personal-care, health and grocery products grew 90% faster than the company’s other categories last year, pointing to share gains, Citigroup analysts said in a note.

Luxury retailer LVMH’s finance chief confirmed on Monday that Amazon is taking market share in personal care, griping that Amazon’s aggressive pricing was slowing growth for its Sephora personal-care line in the U.S.

Another dimension of Amazon’s size—the diversity of its revenue streams—should offer investors further comfort against a weaker backdrop.

The company’s cloud-computing business, called Amazon Web Services, supplied 17% of overall revenue last year. But it accounted for more than half of its operating income because of its wider profit margins.

Amazon also has a large digital-ads business, second only to Google and Meta Platforms. Its video-streaming service has a reach nearing that of Netflix.

Everything will suffer in a global economic rout, but some areas are likely to prove more resilient than others. A lot has to go wrong in the world for Amazon to struggle across the board.

For investors, you would probably rather be in Amazon’s large shoes than someone else’s smaller ones.

Write to Asa Fitch at asa.fitch@wsj.com and Dan Gallagher at dan.gallagher@wsj.com