Amazon Warns of Capacity Constraints Amid AI Supermarket Ambitions
Overview: Amazon.com Inc. faces potential capacity limitations in its cloud computing division despite significant investment plans, primarily to enhance data centers, develop custom chips, and expand AI service offerings.
Investment and Constraints: Amazon plans to invest approximately $100 billion this year, with the majority allocated towards AI-related initiatives within Amazon Web Services (AWS). However, CEO Andy Jassy acknowledges that growth may be hindered by constraints in hardware availability and electricity capacity.
Supply and Capacity Issues: Amazon's ability to bring new data centers online is limited by the availability of chips from third-party suppliers and its own chip design unit, as well as power capacity constraints. Jassy anticipates these challenges to persist until the second half of 2025.
AWS Growth and Competition: AWS revenue increased by 19% to $28.8 billion in the quarter ending December 31, 2024. However, the growth rate remained stagnant compared to the previous quarter, indicating capacity limitations similar to those faced by rivals Google and Microsoft.
Financial Performance and Outlook: Total revenue for the holiday quarter rose by 10% to $187.8 billion, exceeding analyst estimates. Total operating expenses increased by 6.2%, marking the eighth consecutive quarter of revenue outpacing cost increases. For the quarter ending in March, Amazon projects operating income between $14 billion and $18 billion, below analyst expectations due to currency headwinds and a leap year comparison.
Market Reaction: Amazon shares declined by 3% in premarket trading despite a strong holiday quarter, suggesting investor concerns about capacity constraints and first-quarter guidance. The stock has gained 8.9% year-to-date after a 44% surge in 2024.
AI Race and Profitability: Jassy's emphasis on building an "AI supermarket" will put pressure on profitability. Amazon's AI ambitions are expected to weigh down profits, with first-quarter operating income projected to fall short of consensus estimates.