Amazon, echoes rival Microsoft, says it can't keep up with AI demand

By Spencer Soper and Matt Day

 

Amazon.com Inc. warned investors that it could face capacity constraints in its cloud computing division despite plans to invest some $100 billion this year, with most of the money going toward data centers, homegrown chips and other equipment to provide artificial intelligence services. 

Chief Executive Officer Andy Jassy, determined for Amazon to become an AI supermarket, is spending big to retain the company’s edge in cloud-computing services. Still, he warned growth would be “lumpy” and hinted Amazon could face capacity issues related to delays in getting hardware and not having sufficient electricity.

 

“It is true we could be growing faster were it not for some of the constraints on capacity,” Jassy said on a conference call Thursday after the release of fourth-quarter results.

 

The concerns echo those of rival Microsoft Corp., which last week said its cloud sales growth was hurt because it didn’t have enough data centers to handle demand for its AI products.

 

Jassy said the supply of chips — from third parties and Amazon’s own chip design unit — and power capacity are limiting the ability of Amazon Web Services to bring new data centers online. Those constraints will likely ease in the second half of 2025, he said. 

Amazon spent $26.3 billion in capital expenditures in the last three months of 2024, the vast majority of which went toward AI-related projects within AWS. Jassy told analysts on the call that the amount was “reasonably representative” of the rate of outlays the company planned to make in 2025.

 

The company reported that AWS revenue jumped 19 per cent to $28.8 billion in the quarter ended Dec. 31. It was the third straight period of 19 per cent growth for the cloud unit. Operating income generated by the unit was $10.6 billion, exceeding the average projection of $10.1 billion.

 

“AWS growth did not accelerate as anticipated and instead matched Q3 levels, indicating that the company is challenged by the same types of capacity constraints facing rivals Google and Microsoft,” said Sky Canaves, an analyst at Emarketer.

 

Jassy’s warning on AWS growth constraints overshadowed a fairly strong holiday quarter, suggesting the company’s main e-commerce and logistics business is fending off competition from Walmart Inc. and discount upstarts like Temu and Shein. 

 

The shares declined about 4 per cent in extended trading after closing at $238.83 in New York. The stock has gained 8.9 per cent so far this year after a 44 per cent jump in 2024.

 

The AI race will likely weigh down profits. Operating income will be $14 billion to $18 billion in the period ending in March, the Seattle-based company said in a statement. Analysts, on average, projected $18.2 billion, according to data compiled by Bloomberg. First-quarter sales will be as much as $155.5 billion, compared with an average estimate of $158.6 billion.

 

While Amazon’s overall quarter was generally positive, “investors immediate concerns are around Q1 guidance, which was below expectations, mostly because of the impact of a big currency drag and the impact of lapping a leap year,” said Gil Luria, an analyst at DA Davidson & Co. The company said the extra day in the quarter in 2024 boosted sales by about $1.5 billion. 

 

Total revenue in the holiday quarter increased 10 per cent to $187.8 billion, slightly ahead of analyst estimates. Operating profit was $21.2 billion, compared with the average estimate of $18.8 billion. 

 

Total operating expenses rose 6.2 per cent to $166.6 billion — marking the eighth consecutive quarter that Amazon’s revenue increased at a higher rate than costs. The company employed more than 1.55 million full- and part-time workers at the end of the quarter, a 2 per cent increase from a year earlier.