This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Big-cap tech stocks are usually priced at hefty premiums to the broader market for a few reasons.
One, companies such as Microsoft (MSFT) and Amazon (AMZN) have lucrative recurring revenue streams on products and services that others can’t easily replicate. (I was reminded of this on the Opening Bid podcast this week, where a guest told me that Amazon will likely charge Prime members for its coming Rufus AI assistant.)
Two, billions of dollars in investments over decades has created a wide moat around the business — see Apple (AAPL) and its iPhones and App store.
Three, a company such as Nvidia (NVDA) makes a product super in demand for critical business applications — and ones that are much better than those of its rivals.
Mix all these ingredients together, and you can get this simple investment thesis: almost unstoppable business models that warrant major premiums to companies selling, say, commoditized axes, shovels, and gravel.
But it may be time to reconsider how financially unstoppable these big tech businesses are — and the multiples the stocks could fetch — in the age of the Trump trade war with the rest of the world.
All of these businesses stand to be impacted, and in ways that may surprise investors.
At first blush, one would think Amazon could easily withstand a trade war. It has gazillions of Prime members in the US and mints money from Amazon Web Services (AWS). It’s spending billions of dollars to add robots in its fulfillment centers and widen its lead over other retailers.
But at the end of the day, Amazon is still a retailer. It ships those Prime members all sorts of junk around the clock.
Morgan Stanley analyst Brian Nowak estimates that two-thirds of Amazon’s first-party merchandise cost of goods sold is non-grocery, with 40% exposure to China. Think of that cheap-as-hell car tire inflator you bought this winter that likely came from China.
An extended tariff war may chisel away material chunks of Amazon’s profits, something the market isn’t factoring in as the stock is valued at 35 times estimated forward earnings. The S&P 500 is valued around 22 times.
“It will be important to monitor import cost pressure pass through vs. absorption,” Nowak pointed out.
This tariff risk could also be applied to also-ran eBay (EBAY) — Nowak estimates about 11% of its revenue is derived from China-based sellers.
