Microsoft Pulls Plug On AI Data Center Leases, Says Analyst: Oversupply Situation Likely

Microsoft Corp. MSFT has reportedly begun to cancel leases for a significant portion of its AI data center capacity in the United States, as per a recent report by TD Cowen.

What Happened: TD Cowen disclosed on Friday that Microsoft has nullified leases equivalent to “a couple of hundred megawatts” of capacity, Bloomberg reported on Monday. Additionally, the tech giant has also ceased the conversion of so-called statements of qualifications, which usually lead to formal leases. This strategy is reminiscent of tactics previously employed by competitors like Meta Platforms Inc. META when they decided to reduce capital expenditure.

TD Cowen’s report also hints at Microsoft’s gradual retreat from data center construction and acquisition. The report indicates that Microsoft has let agreements totaling over a gigawatt at larger sites expire and has withdrawn from several deals, each involving approximately 100 megawatts.

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Why It Matters: This development comes unexpectedly as in January, Microsoft announced its plans to invest around $80 billion in developing AI-powered data centers and deploying AI and cloud-based applications globally. Microsoft’s possible reduction in spending and data center construction sparks concerns about whether the company is becoming more cautious about future demand.

According to TD Cowen’s analysts, these changes may suggest that Microsoft is potentially facing an oversupply situation. They also speculated that Microsoft’s partnership with OpenAI could be shifting in ways that mean the software giant won’t need the same level of investments. The analysts, however, stated that they are awaiting more details on this.

In January, Microsoft paused construction on parts of its ambitious data center project in Mount Pleasant, citing changes in technology and design re-evaluation. This move, coupled with the recent lease cancellations, could signal a shift in Microsoft’s data center strategy.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.