Amazon Invests $100 Billion in AI as Cloud Division Faces Capacity Challenges

Amazon has cautioned investors that despite its plan to invest approximately $100 billion in 2024, primarily focusing on data centers, self-developed chips, and other AI-supporting devices, the company's cloud computing division may encounter capacity constraints.

Amazon CEO Andy Jassy is committed to transforming the company into a leader in the AI sector, allocating significant resources to maintain Amazon's leading position in cloud services. However, he openly admitted that future growth could be "uneven," hinting at potential challenges related to hardware and power supply shortages affecting capacity.

During the earnings call following the release of Q4 results on Thursday, Jassy stated, "Had it not been for some capacity constraints, our growth rate could have been even faster."

This concern mirrors that of competitor Microsoft, which last week revealed that insufficient data center capacity had impacted cloud sales growth due to AI product demand.

Jassy noted that both third-party chip supplies and those from Amazon's internal chip design team, along with power capacity issues, are limiting the ability of Amazon Web Services (AWS) to launch new data centers. He anticipates these limitations might ease by the second half of 2025.

In the final three months of 2024, Amazon's capital expenditure reached $26.3 billion, with the majority allocated to AI-related projects within AWS. During the call, Jassy informed analysts that this figure represents a "reasonable estimate" of the company's planned spending levels for 2025.

The company reported that AWS revenue grew by 19% to reach $28.8 billion in the quarter ending December 31, marking the third consecutive quarter of 19% growth. The segment's operating profit was $10.6 billion, surpassing the market consensus expectation of $10.1 billion.

Emarketer analyst Sky Canaves remarked, "AWS growth did not accelerate as expected but remained flat compared to Q3, indicating that the company faces similar capacity limitations as competitors Google and Microsoft."

Although Jassy's warning about AWS growth constraints overshadowed an otherwise strong holiday season performance, it underscores the resilience of Amazon's core e-commerce and logistics businesses against competition from Walmart, Temu, and Shein.

After closing at $238.83 in New York, shares fell approximately 4% in extended trading. However, the stock price has risen 8.9% year-to-date and climbed 44% in 2024.

The competition in the AI field may weigh on profitability. Amazon stated that operating income for the quarter ending in March is expected to range between $14 billion and $18 billion. Analysts' average forecast, according to Bloomberg data, stands at $18.2 billion. First-quarter sales are projected to reach $155.5 billion, compared to the market's average estimate of $158.6 billion.

While Amazon's overall quarterly performance was generally positive, DA Davidson & Co. analyst Gil Luria pointed out, "Investors are focused on the below-expectation Q1 guidance, largely driven by significant FX headwinds and the impact of the leap year." The company mentioned that the extra day in Q1 2024 added approximately $1.5 billion to sales.

Total revenue during the holiday quarter increased by 10%, reaching $187.8 billion, slightly above analyst expectations. Operating profit amounted to $21.2 billion, exceeding the market consensus estimate of $18.8 billion.

Total operating expenses rose by 6.2% to $166.6 billion—marking the eighth consecutive quarter where Amazon achieved higher revenue growth than cost growth. By the end of the quarter, the company employed over 1.55 million full-time and part-time workers, representing a 2% increase from the previous year.