Amazon revises server lifespan amid AI shift, impacting 2025 earnings
The transition from CPUs to GPUs and accelerated AI-driven innovation shortens server depreciation cycles, signaling a broader industry shift
On February 7, 2025, Amazon (Ticker: AMZN) revised the useful life of certain servers and networking equipment from six to five years, effective January 1, 2025, which is expected to reduce 2025 operating income by $0.7 billion. Additionally, Amazon decided to retire some equipment early, leading to $920 million in accelerated depreciation in Q4 2024 and an anticipated $0.6 billion reduction in 2025 operating income.
From Amazon’s 10-K (emphasis added):
“We completed our most recent servers and networking equipment useful life study in Q4 2024, and are changing the useful lives of a subset of our servers and networking equipment, effective January 1, 2025, from six years to five years. For those assets included in “Property and equipment, net” as of December 31, 2024, whose useful life will change from six years to five years, we anticipate a decrease in 2025 operating income of approximately $0.7 billion. We expect to continue to acquire more of these server and networking assets in 2025. In 2024, we also determined, primarily in the fourth quarter, to retire early certain of our servers and networking equipment. We recorded approximately $920 million of accelerated depreciation and related charges for the quarter ended December 31, 2024 related to these decisions. The accelerated depreciation will continue into 2025 and decrease operating income by approximately $0.6 billion in 2025. “
Accounting rules treat changes in depreciable life as a change in accounting estimate, reported prospectively. Notably, in 2024, Amazon and other technological giants such as Alphabet, Microsoft, and Meta have extended the useful life of servers and networking equipment from four to five or even six years, cutting depreciation expenses by billions.
From Amazon’s 10-K (emphasis added):
“We had previously increased the useful life of our servers from five years to six years effective January 1, 2024. The effect of this change for the year ended December 31, 2024, based on servers that were included in “Property and equipment, net” as of December 31, 2023 and those acquired during the year ended December 31, 2024, was a reduction in depreciation and amortization expense of $3.2 billion and a benefit to net income of $2.5 billion, or $0.23 per basic share and $0.23 per diluted share.”
According to Amazon, the reversal of the estimated useful life is driven by the rapid advancement of AI and machine learning technology.
“These two changes above are due to an increased pace of technology development, particularly in the area of artificial intelligence and machine learning.”
Mark Maurer, citing experts, previously reported for the WSJ, that tech companies are retiring servers less frequently because of the slower pace of innovation in releasing new central processing units:
“What’s more, the pace of development in central processing units, which go into servers and personal computers, has slowed in recent years, limiting the improvements companies can make when installing new servers, Mr. Galabov said.”
In my July 2024 piece, I argued that extending the useful life of servers to six years is unsustainable in the long run because the higher demand for computational power will likely shift the processing units in the data centers from CPUs to GPUs. Further, given the pace of innovation in the GPU space, the useful life of the GPUs is likely to be shorter, leading to understated depreciation expenses:
“If, as the WSJ reported, technological improvements are a key factor in deciding when to replace servers, the lifespan of the GPUs is likely to be shorter than that of the CPUs.
Accounting is, for the most part, reactionary. Changing depreciation policy and recording a multibillion change in accounting estimate requires sufficient historical data and volumes of supporting documentation. Currently, the majority of servers in the data centers of large cloud providers are still likely to rely on traditional CPUs. However, if the mix of the processing units in the data centers shifts toward more GPUs, spreading the cost of servers over six years may lead to understated depreciation expenses and overstated EPS.”
The remaining Amazon’s servers are still depreciated over the lifespan of six years. However, Amazon also noted that the Company is retiring the old servers – arguably because the Company needs more floor space to fit the new generation of GPUs that the Company is planning to install. The net outcome is that the average useful life of Amazon’s server and networking equipment will likely approach five years in the next several years, leading to higher depreciation expenses.
Who else is affected, and by how much? The table below, which was previously reported in my July 2024 piece, reflects the list of companies that increased the useful life of the servers, with the corresponding impact on the income statement where applicable:
While the exact impact depends on how quickly the companies will replace the equipment, it is reasonable to assume that most, if not all, of the companies in the above table will follow Amazon’s lead and reduce the useful life.
For questions and data inquiries please contact olga@deepquarry.com.
Disclaimer: This newsletter does not provide investment advice. The views expressed in this newsletter are personal views of the authors based on their interpretation of publicly available information.