Amazon warns of capacity constraints in cloud division despite $100 billion AI investment

SEATTLE: Amazon.com Inc. alerted investors that its cloud computing division may encounter capacity limitations, despite plans to invest approximately $100 billion this year, primarily for data centres, in-house chips, and other equipment to support artificial intelligence services. CEO Andy Jassy is committed to transforming Amazon into a leader in AI solutions, allocating substantial resources to maintain the company’s competitive advantage in cloud services. However, he cautioned that growth might be “lumpy” and suggested that Amazon could experience capacity challenges due to hardware procurement delays and insufficient power supply.

“It is true we could be growing faster were it not for some of the constraints on capacity,” Jassy commented during a call following the release of the fourth-quarter results. This sentiment reflects similar concerns raised by competing firm Microsoft Corp., which recently indicated that its growth in cloud sales was stunted due to a lack of data centres to meet demand for its AI offerings.

Jassy noted that both the availability of chips—from third-party vendors and Amazon’s own design unit—and power supply are hindering Amazon Web Services’ (AWS) ability to launch new data centres. He expects these constraints to improve by the latter half of 2025.

In the final three months of 2024, Amazon invested $26.3 billion in capital expenditures, largely directed toward AI initiatives within AWS. Jassy indicated that this expenditure level would likely reflect the company’s spending rates in 2025.

For the quarter ending December 31, AWS revenue grew by 19 percent to $28.8 billion, marking the third consecutive quarter of 19 percent growth for the cloud division. Operating income from AWS reached $10.6 billion, surpassing the average expectations of $10.1 billion.

Also read: Amazon’s AI revamp of Alexa assistant nears unveiling

Analysts observed, “AWS growth did not accelerate as anticipated and matched Q3 levels, highlighting that the company faces the same capacity constraints affecting competitors such as Google and Microsoft.” Jassy’s warnings regarding potential AWS growth limitations overshadowed a relatively strong holiday performance, indicating that Amazon’s core e-commerce and logistics operations continue to navigate competition from firms like Walmart Inc. and emerging discount brands such as Temu and Shein.

Following this news, Amazon’s shares dipped around 4 percent in after-hours trading after closing at $238.83 in New York. So far, the stock has appreciated 8.9 percent this year, building on a 44 percent increase in 2024.

The pursuit of AI leadership is anticipated to exert pressure on profits. The company projected operating income between $14 billion and $18 billion for the quarter ending in March, below analysts’ average estimate of $18.2 billion. For the first quarter, sales are expected to reach up to $155.5 billion, contrasted with the average estimate of $158.6 billion.

While Amazon’s overall quarterly performance was generally satisfactory, “investors’ immediate concerns centre on Q1 guidance, which fell short of expectations, mainly due to significant currency effects and the complications arising from last year’s leap year,” an analyst noted. The company highlighted that the additional day in the previous year’s quarter contributed an estimated $1.5 billion to sales.