(Bloomberg) — Microsoft Corp. has canceled some leases for US data center capacity, according to TD Cowen, raising broader concerns over whether it’s securing more AI computing capacity than it needs in the long term.
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OpenAI’s biggest backer has voided leases in the US totaling “a couple of hundred megawatts” of capacity — the equivalent of roughly two data centers — canceling agreements with at least a couple of private operators, the US brokerage wrote Friday, citing “channel checks” or inquiries with supply chain providers. TD Cowen said its checks also suggest Microsoft has pulled back on converting so-called statements of qualifications, agreements that usually lead to formal leases.
Microsoft in a statement on Monday reiterated its spending target for the fiscal year ending June, but declined to comment on TD Cowen’s note.
Exactly why Microsoft may be pulling some leases is unclear. TD Cowen posited in a second report on Monday that OpenAI is shifting workloads from Microsoft to Oracle Corp. as part of a relatively new partnership. The tech giant is also among the largest owners and operators of data centers in its own right and is spending billions of dollars on its own capacity. TD Cowen separately suggested that Microsoft may be reallocating some of that in-house investment to the US from abroad.
“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.
Microsoft shares were little changed in premarket trading on Monday.
A potential lease pullback by Microsoft raises broader questions about whether the company — one of the frontrunners among Big Tech in AI — is growing cautious about the outlook for overall demand. The company has said it expects to spend $80 billion this fiscal year on AI data centers, and on a late January earnings call, Chief Executive Officer Satya Nadella said Microsoft has to sustain spending to meet “exponentially more demand.”
“While we may strategically pace or adjust our infrastructure in some areas, we will continue to grow strongly in all regions,” a Microsoft spokesperson said in the company’s statement. “Our plans to spend over $80 billion on infrastructure this FY remains on track as we continue to grow at a record pace to meet customer demand.”
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European stocks tied to the energy sector dropped on the report, which may suggest Big Tech companies will need less power to run their data centers. Schneider Electric SE and Siemens Energy AG slid.
Critics have consistently pointed out a dearth of practical, real-world applications for AI, even as Microsoft, Meta Platforms Inc., Alphabet Inc. and Amazon.com Inc. have pledged to spend billions on the data centers needed to train, develop and host AI services.
Wall Street stepped up its questions about the massive outlays after the Chinese upstart DeepSeek released a new open-source AI model that it claims rivals the abilities of US technology at a fraction of the cost.
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Microsoft executives have played down concerns about AI overcapacity. It’s spending more than it ever has in its history, outlays that mostly go to the chips and data centers required to fuel power-hungry AI services.
Rivals have also doubled down on their AI spending commitments. In recent weeks Amazon, Alphabet and Meta have pledged to spend $100 billion, $75 billion and up to $65 billion respectively on AI infrastructure. Chinese e-commerce giant Alibaba Group Holding Ltd. said this week it would invest more than 380 billion yuan ($53 billion) over the next three years as it seeks to become a leader in the field.
In Friday’s report, TD Cowen’s analysts wrote that their channel checks had unearthed a number of signs that Microsoft is gradually retreating. They learned that Microsoft had let more than a gigawatt of agreements on larger sites expire and walked 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.)
TD Cowen said Microsoft used facility and power delays as justification for the termination of leases. That was a tactic rivals such as Meta previously employed when curbing capital spending, the firm wrote.
“To me this all looks and sounds like business as usual,” Mizuho Securities analyst Jordan Klein said in a note. “A company this large and with $80 billion of annual spend has the right to move in and out of data center leases, many of which were never officially signed.”
Large cloud hyperscalers typically use a mixture of leased and owned data centers across many locations, Klein said, so investors should expect some degree of “tweaking” of plans.
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 possibly $500 billion, on data centers and other AI infrastructure.
In January, Microsoft said it would alter its multiyear deal with OpenAI so the AI startup could use cloud-computing services from rival providers. Microsoft, which had been the company’s exclusive cloud provider, still has a right of first refusal when OpenAI seeks computing horsepower to train and run its AI models.
–With assistance from Debby Wu and Charles Capel.
(Updates with tech companies’ capital spending on AI and Mizuho analyst comment)
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