Is the AI arms race slowing down? Microsoft Corp., a leading contender in the artificial intelligence arena, has reportedly begun canceling leases for a substantial amount of data center capacity in the US, prompting speculation about whether the company may be tempering its ambitions or reevaluating its strategy.
TD Cowen, a US brokerage firm, reported on Friday that Microsoft has voided leases totaling “a couple of hundred megawatts” of data center capacity, citing inquiries with supply chain providers.
The brokerage also noted that Microsoft has stopped converting statements of qualifications – agreements typically leading to formal leases – a tactic previously employed by rivals like Meta Platforms Inc. when scaling back capital spending.
This potential shift is further compounded by Microsoft’s redirecting of a portion of its planned international spending to the US, which TD Cowen interprets as a “material slowdown in international leasing.”
The $80 billion question: spending target remains intact… for now
This potential pullback by Microsoft on spending and data center construction naturally raises questions.
Is the company, one of the frontrunners among Big Tech in AI, growing cautious about the outlook for demand, or is it simply optimizing its infrastructure deployment?
Microsoft has previously stated its expectation to spend $80 billion this fiscal year on AI data centers.
On a late January earnings call, CEO Satya Nadella emphasized the need to sustain spending to meet “exponentially more demand.”
Microsoft in a statement on Monday reiterated its spending target for the fiscal year ending in June, but declined to specifically comment on the TD Cowen’s note.
“While we may strategically pace or adjust our infrastructure in some areas, we will continue to grow strongly in all regions,” a company spokesperson told Bloomberg.
Our plans to spend over $80B on infrastructure this FY remains on track as we continue to grow at a record pace to meet customer demand.
Ripple effect: energy stocks feel the impact
The TD Cowen report had an immediate impact on European stocks tied to the energy sector, suggesting that big tech companies may be poised to consume less power in running their data centers.
Schneider Electric SE, a key supplier of electrical equipment, slid as much as 7.2%, while Siemens Energy AG, a major player in energy technology, fell more than 10%.
Is AI overpromising?
Critics have consistently pointed to a perceived lack of practical, real-world applications for AI, even as Microsoft, Meta, and Amazon.com Inc. have pledged billions towards the data centers required to train, develop, and host AI services.
Wall Street has increasingly questioned the massive outlays on AI infrastructure.
The Chinese upstart DeepSeek has recently unveiled a new open-source AI model that it claims rivals the capabilities of US technology, but at a fraction of the cost.
“While we have yet to get the level of color via our channel checks that we would like into why this is occurring, our initial reaction is that this is tied to Microsoft potentially being in an oversupply position,” TD Cowen analysts Michael Elias, Cooper Belanger, and Gregory Williams wrote, emphasizing that it was just their interpretation.
Microsoft executives have consistently downplayed concerns about AI overcapacity, highlighting the company’s record-breaking levels of spending.
However, TD Cowen’s analysts wrote that their channel checks had unearthed a number of signals about Microsoft’s gradual retreat from data center construction and acquisition.
This includes letting more than a gigawatt of agreements on larger sites expire, and walking away from “multiple” deals involving about 100 megawatts each (data center capacity is often stated in terms of the power they need to stay up and running).
Shifting alliances: the OpenAI equation
Microsoft’s alliance with OpenAI may also be evolving in ways that mean the software giant won’t need the same kind of investments.
In January, OpenAI and SoftBank Group Corp. announced a joint venture to spend at least $100 billion and perhaps $500 billion on data centers and other AI infrastructure.
Whether Microsoft’s moves reflect a strategic pause, a response to changing market dynamics, or a combination of both, it’s clear that the company is carefully evaluating its approach to AI infrastructure.
The coming months will reveal whether this is a temporary adjustment or a sign of a more fundamental shift in the AI landscape.
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