Microsoft is pulling back data center expansion and showing potential changes in the AI race. According to a report by TD Cowen analysts, the company cancelled leases for hundreds of megawatts of data center capacity in the US, increasing international spending. The move raises questions about whether the explosive growth of AI is beginning to reach a check of reality.
The cancelled lease includes at least two private data center operators, with some transactions exceeding 100 megawatts. Microsoft also expired abandoned plans for additional land acquisition due to contracts with capacity exceeding gigawatts. TD Cowen’s channel check suggests that the cancellation may be linked to Openai, indicating “oversupply”.
“Microsoft Corporation (NASDAQ: MSFT) canceled data center leases with at least two US operators, and the company was also expanding its international spending plans,” Investing.com said analysts at TD Cowen I quoted it and reported it.
In his report, TD Cowen said: “Recent channel checks show that Microsoft has ended its selection leases with at least two private data center operators in multiple US markets at a rate of ‘hundreds MW’. Our checks show that in some circumstances Microsoft is using facility/power delays as justification for termination.
Microsoft rethinks AI infrastructure investments
In January, Microsoft CEO Satya Nadella reaffirmed the company’s commitment to expanding its AI infrastructure, informing analysts that it will continue to invest in data centers while working to improve cost-effectiveness. Ta.
However, that expansion could be losing momentum. Analysts at TD Cowen suggest that changes in Microsoft’s data center investment could be linked to Openai. This appears to strengthen its relationship with Japan’s SoftBank Group as a major financial supporter.
Openai and Softbank recently announced Project Stargate, a $500 billion initiative to build AI data centers, a venture Microsoft is involved in.
Despite being Openai’s biggest investor since 2019, Microsoft’s deep integration of Openai’s model into software has yet to lead to widespread consumer success. Now, Openai is expanding its funding source, which could change the unprecedented role in Microsoft’s AI infrastructure.
Microsoft previously committed $80 billion to AI data centers for fiscal year 2025, but concerns about cost and efficiency have prompted a reassessment. Some of the cancelled leases were reportedly justified using facility and power delays, similar to how Meta pulled back with its metaverse-related data center project.
Is AI hype cooled?
The tech giant is putting billions into AI infrastructure and bets that demand for advanced models continues to increase. However, signs of restraint are manifesting. Openai’s recent partnership with SoftBank and the introduction of low-cost AI models such as Deepseek’s have encouraged businesses to reassess whether large-scale investments in AI infrastructure are needed.
TD Cowen’s report highlights how Microsoft has pulled back by converting its signed qualification statement (SOQ) into a full-fledged lease. This slowdown suggests a rethink at the highest level, as SOQs usually show almost certain commitment to build.
Impact on Azure and AI Arms Race
Microsoft’s Azure Cloud platform has become a major driver of AI adoption, but this shift could indicate a cooling period. Bernstein analysts believe these cancelled contracts could indicate a more sustained slowdown in Azure growth.
Analysts at Bernstein said on Sunday that uncertainty over Microsoft’s cancelled data center contracts could indicate a broader slowdown for cloud computing arm Azure. Microsoft had forecast Azure growth of 31% to 32% in the third quarter. This is a diagram that did not meet the expectations of analysts.
Microsoft has been Openai’s biggest backer since 2019, integrating models across products such as Bing and Office. However, once new AI players enter the field and enter the infrastructure cost balloon, the company may be looking for a more measured approach.
It remains to be seen whether this is a short-term adjustment or a long-term trend. But one thing is clear. The AI Gold Rush is not without speed bumps.
Here is the partial transcript of the TD Cowen report:
TD Securities (USA) LLC
Quick Take: Industry Updates
February 21, 2025
Communications Infrastructure: Data Center
Channel check indicates data center lease cancellation by Microsoft
TD Cowen Insight
Our channel checks indicate that there is MSFT.
A cancelled lease in the US will sum up at least two private data center operators and a total of “several hundred MW” to revert conversions to SOQ leases and reassign a significant portion of international spending to the US I did.
When combined with previous channel checks, it refers to a potential oversupply position of the MSFT.
Our channel checks show that Microsoft has cancelled the Select US Data Center lease and cancelled the pullback on SOQ to lease the conversion. Rebounds international market expansion
Recent channel checks show that Microsoft has ended its selection lease with at least two private data center operators in multiple US markets, in line with the adjustment of “hundreds of MW”. Our checks show that in some circumstances Microsoft is using facility/power delays as justification for termination.
As highlighted in the 2023 takeout from PTC, this is what META cancels multiple data center leases in the US after learning in Check that Meta has cancelled its $4 billion CAPEX program related to Metaverse It’s the same tactic used to do (then Meta cut its cap guidance by $400 million after two weeks).
Apart from that, our channel check suggests that Microsoft pulled back by converting it into a signed lease of a negotiated and signed qualification statement (SOQ) (precursor to a data center lease).
At this point it is currently unknown to us whether this is merely a delay in the SOQ to lease the conversion, or whether conversion to the lease is a complete termination of the SOQ that is not expected.
In the context, based on our check, SOQ sets terms for the lease and does not constitute a lease agreement. However, the conversion rate of SOQ to a signed lease is close to 100%, and data center operators use this as a signal to begin building the data center.
Furthermore, our channel checks show that Microsoft is reassigning a significant portion of its expected international spending to the US.
Why is this happening?
I haven’t yet got the level of detail via a channel check on why this is happening, but the initial response is related to this that Microsoft could potentially be in an overposition. It’s about being there.
As highlighted in a recent takeaway from PTC, I learned about Microsoft through channel checks.
Between multiple +100MW transactions in multiple markets in the early/mid-term of negotiations, expiring +1GW of LOIs on larger footprint sites, and at least five parcels of land contracted across multiple tiers. Ta. market.
At the time, our view highlighted that the size of potential data center capacity and the decision to pull back land acquisition (supporting the growth of long-term capacity in the core) indicates a loss of key demand signals. did. Microsoft was responding to it in the first place.
We believed that the change in appetite for their abilities was linked to Openai.
At that point, consider this:
Microsoft was the most active capacity borrower in 2023 and 1H24, raising capacity at that time compared to forecasts considering OpenAI workloads. However, as indicated by the decision to suspend construction at Wisconsin data centers, our previous channel checks have been shown to support Openai, so it could have been sourced. He has high abilities. In particular, in areas where capacity does not fit in the cloud, companies may have excessive data center capacity compared to new forecasts.
This is an interpretation of the current situation. However, our views may change when conducting gradual channel checks.
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