Amazon Faces Challenges Amid AI Demand, Shares Drop

Amazon's shares fell by 4% on Friday, following comments from CEO Andy Jassy regarding potential capacity limitations in the company's cloud computing sector. This drop came despite ambitious plans for $100 billion in capital expenditures this year.

During an earnings call on Thursday, Jassy acknowledged, "It is true we could be growing faster were it not for some of the constraints on capacity." He highlighted issues such as delays in hardware acquisition and insufficient electricity supply that are currently hindering growth.

Looking ahead, Jassy had indicated in October that Amazon may spend more in 2025 compared to the approximately $83 billion spent last year. This increased spending is largely attributed to continued investments in artificial intelligence.

According to Jassy, the planned capital expenditures for this year are part of a focused effort on AI development. He stated, "We spent $26.3 billion in capex in Q4, and I think that is reasonably representative of what you expect an annualized capex rate in 2025." Most of this spending, according to him, will be geared towards AI for AWS (Amazon Web Services), which faced some challenges in the latest earnings report.

Similar to other technology giants, Amazon has been investing heavily in data centers and related hardware to accommodate the rapid growth in demand for generative AI technologies. This trend accelerated in 2022 following the launch of ChatGPT by OpenAI, prompting competitors to quickly develop their own chatbot offerings.

Amazon has introduced various AI products, including generative Nova models, Trainium chips, a shopping chatbot, and Bedrock, a platform for third-party AI models.

In the current environment, tech companies are expected to maintain high levels of spending on AI. Other industry leaders like Google parent Alphabet have planned about $75 billion in capital expenditures, while Microsoft and Meta have earmarked $80 billion and up to $65 billion, respectively, for data centers and computing infrastructure.

However, the sector's spending has come under scrutiny, especially after a Chinese AI startup, DeepSeek, claimed to have developed its R1 model at a fraction of the cost than competitors, using less than $6 million within just two months. This revelation sparked concern throughout the industry and led to a significant selloff in stocks.

Amazon has also reported decreased performance in its cloud unit alongside disappointing revenue and profit figures. In an effort to reassure investors, Jassy expressed confidence in the long-term viability of their AI investments, describing this opportunity as a "once-in-a-lifetime" occurrence.

He further stated, "I think that both our business, our customers and shareholders will be happy, medium to long-term, that we’re pursuing the capital opportunity and the business opportunity in AI." Jassy indicated that part of this year's capital expenditures will also be directed towards enhancing operations in Amazon's stores business, specifically to improve delivery speed and reduce service costs.

Amazon, AI, cloud