Amazon’s Strong Q4 Overshadowed by Weak Guidance and AI Capacity Constraints

Key points:

• Strong Q4 performance: Amazon expectations in revenue and EPS, driven by robust holiday sales, AWS growth, and strong ad revenue.
• Weaker Q1 outlook: Guidance for Q1 revenue fell short of estimates, with foreign exchange headwinds and AI/cloud capacity constraints weighing on growth.
• USD 100 billion AI investment: Amazon is doubling down on AI and cloud infrastructure, but supply chain and power limitations could slow AWS expansion in the short term.

Amazon’s latest earnings report painted a mixed picture—strong financial results in Q4 2024 but a weaker-than-expected outlook for early 2025.

The e-commerce and cloud giant beat analysts’ estimates on both revenue and profit, yet investors were left concerned about slowing growth, foreign exchange headwinds, and capacity constraints in its AI and cloud infrastructure. These concerns sent Amazon’s stock down about 4% in after-hours trading.

A Strong Finish to 2024

Amazon closed 2024 with impressive numbers, showcasing its ability to generate solid revenue and profit growth despite economic uncertainties.

• Revenue: The company reported USD 187.8 billion in net sales, up 10% year-over-year and slightly ahead of analyst expectations of USD 187.3 billion.
• Earnings per Share (EPS): EPS came in at USD 1.86, comfortably beating forecasts of USD 1.49.
• Net Income: Almost doubled to USD 20 billion from USD 10.6 billion a year ago.
• Operating Margin: Improved to 11.3% from 7.8% in the same quarter last year, thanks to cost-cutting measures.

This strong performance was driven by several key factors:

• Holiday Shopping Boom – The holiday season delivered robust e-commerce sales, with Amazon’s online retail revenue rising 7% to USD 75.6 billion.
• AWS Continues to Deliver – Amazon Web Services (AWS) saw a 19% increase in revenue, reaching USD 28.8 billion. However, growth remained flat compared to previous quarters and slightly below analyst expectations. Worth mentioning is, however, that both Alphabet and Microsoft saw declining growth rates in their cloud business, while Amazons grew at the same pace as earlier.
• Advertising Strength – Amazon’s ad business surged 18% to USD 17.3 billion, reinforcing its position as a dominant player in digital advertising.

Guidance Disappoints, Stock Slides

Despite the strong quarter, Amazon’s outlook for Q1 2025 spooked investors. The company projects revenue between USD 151 billion and USD 155.5 billion, significantly below estimates of USD 158.6 billion. Operating income is forecasted at USD 14 billion to USD 18 billion, also lower than analysts’ projections. Amazon blamed foreign exchange headwinds for a drag on expected revenue. These cautious projections suggest that Amazon expects a slow start to the year, which led to a 4% decline in its stock price in after-hours trading.

Amazon’s USD 100 Billion AI Bet

One of the biggest takeaways from the earnings call was Amazon’s massive USD 100 billion capital expenditure plan for 2025, largely focused on AI and cloud infrastructure. The company is doubling down on AI-powered services within AWS, launching new AI models and expanding its custom AI chip production.

CEO Andy Jassy described AI as a “once-in-a-lifetime opportunity”, suggesting that Amazon sees AI as the next big growth driver. However, Amazon also warned of capacity constraints, including delays in acquiring AI chips and the challenge of securing enough electricity to power data centers, which could limit AWS growth in the short term.

Key Risks for Investors

While Amazon remains a dominant force, there are some challenges to keep in mind:

• Slowing AWS Growth – The cloud business remains profitable, but its growth rate is stagnating at 19%, while competitors like Microsoft’s Azure (31%) and Google Cloud (30%) are growing faster.
• Massive AI Spending – A USD 100 billion investment in AI is a bold move, but if the returns take longer than expected, it could weigh on profitability.
• Foreign Exchange Headwinds – A stronger U.S. dollar is already impacting revenue growth, and further currency fluctuations could add pressure.

Takeaways for Investors

• Short-term caution: Amazon’s Q1 guidance is weaker than expected, so the stock may remain under pressure in the coming months.
• Long-term potential: AI and cloud remain strong growth drivers, but Amazon must execute well on its AI investments to justify its spending.
• Retail & advertising resilience: Despite economic uncertainties, Amazon’s core retail business and ad segment continue to grow steadily.

Overall, Amazon delivered a strong quarter but faces short-term headwinds from slowing AWS growth, AI capacity constraints, and a cautious Q1 outlook. Keep an eye on AWS growth, AI developments, and future revenue guidance to gauge Amazon’s trajectory in the months ahead.