Microsoft Cancels AI Data Centre Leases, Stokes Fears of Overcapacity

A US brokerage report on tech giant Microsoft has left tech stock investors on Wall Street scrambling. The report by TD Cowen, released on February 21, claimed that Microsoft is cutting back and rerouting some of its spending on data centers.

The report led to Microsoft shares falling about 1%, while shares of energy suppliers to these data centers, like Constellation Energy and Vistra, fell 5.9% and 5.1%, respectively. The tech-heavy Nasdaq index dropped 1.21% in the last trading session. The effect migrated west to Europe, where shares of German firm Siemens Energy declined by 7%, and French company Schneider Electric fell by 4%.

Later, Microsoft clarified that its plan to invest over $80 billion in AI and cloud capacity this fiscal year remains intact, although they "may strategically pace or adjust" in some areas.

What the TD Cowen Report Said About Microsoft

According to a report by TD Cowen analysts Michael Elias, Cooper Belanger, and Gregory Williams, Microsoft has voided data center leases totaling several hundred megawatts and let over a gigawatt of agreements expire, Bloomberg said.

The company has also stopped converting statements of qualifications into formal leases, a tactic previously employed by Meta Platforms Inc. when cutting back on capital spending, the brokerage firm claimed, citing channel checks with supply chain providers.

Additionally, they said that Microsoft is redirecting some of its planned international spending to the U.S., indicating a slowdown in international leasing. This shift, TD Cowen analysts claimed, was due to OpenAI's decision to partner with alternative providers, such as Oracle Corp., which is expected to have a neutral effect on third-party data center demand.

Why the Report Worries AI Investors

Last October, Microsoft CEO Satya Nadella mentioned that the company's revenue generation from AI services had run into some "external constraints" due to a lack of data center capacity.

"Data centers don’t get built overnight," Nadella had noted.

Earlier this year, following through on the CEO's concerns, the firm said that in FY 2025, Microsoft will invest approximately $80 billion to build out AI-enabled data centers to train AI models and deploy AI and cloud-based applications around the world. More than half of this investment was set to be in the United States.

Microsoft was not alone in its ambitious AI and data center spending spree. According to an analysis by CNBC, Meta, Amazon, Alphabet, and Microsoft plan to spend $320 billion combined on AI technologies and data center buildouts in 2025.

But critics have often flagged the lack of real-world applications for AI that could justify such massive spending. TD Cowen, in its report, noted that Microsoft may potentially be in an "oversupply position" in its data center capacity.

Investor skepticism is also growing over the billions of dollars US tech firms have invested in AI infrastructure, due to breakthroughs by Chinese startup DeepSeek, which has demonstrated AI technology at significantly lower costs.

A Bernstein analyst told Reuters that Microsoft’s move could indicate lower demand, particularly following lackluster quarterly results from major cloud companies. However, he notes that Microsoft's recent capacity build-up may have contributed to this shift, as the company had previously struggled to meet demand and may have over-rented data centers and GPU capacity as a result.