AWS Lambda is a serverless computing service that enables users to run code without provisioning or managing servers. It allows for seamless scalability, cheaper hosting costs, and no operational overhead. However, it also has limitations such as a 250MB package size limit, a maximum execution time of 15 minutes, and cumbersome deployment processes. To overcome these challenges, users can use Lambda Layers to add external dependencies, Docker containers to exceed the package size limit, and GitHub Actions for continuous deployment. By leveraging these tools and features, users can build efficient and scalable data pipelines with AWS Lambda.