- Microsoft's stock slipped Monday after an analyst note said it was canceling some US data center leases.
- The TD Cowen analysts said the pullback may indicate Microsoft is in a "potential oversupply position."
- Microsoft told BI it "may strategically pace or adjust our infrastructure in some areas" and will "continue to grow strongly."
Microsoft's stock slid slightly on Monday morning after an analyst note said that the company has canceled leases for some of its US data centers, suggesting AI demand might be lower than the company expected.
In a Friday note that generated discussion online over the weekend, analysts at TD Cowen published takeaways from their recent channel checks, which often seek out information from a company's supply chain and distribution channels.
"Our channel checks indicate that MSFT has 1) cancelled leases in the US totaling 'a couple of hundred MWs' with at least two private data center operators, 2) has pulled back on the conversion of SOQ's to leases, and 3) has re-allocated a considerable portion of its international spend to the US," the analyst note said, referring to megawatts and statements of qualifications, which often precede lease signings and which data center operators frequently take as a green light on data center construction.
"When coupled with our prior channel checks, it points to a potential oversupply position for MSFT," the analysts wrote. In some cases, Microsoft is "using facility/power delays as a justification for the termination," they added.
The analysts said it was unclear if the conversion of SOQs to leases was simply delayed or if they were outright terminated. Lastly, the analysts said the reallocated international spending suggests "a material slowdown in international leasing."
Taken together, their observations at the moment suggest to the analysts that Microsoft "may have excess data center capacity relative to its new forecast."
Microsoft's stock was down around 2% in Monday morning trading.
In another note published Monday, the TD Cowen analysts said they believe Microsoft's actions are "related to a shift in incremental OpenAI workloads to Oracle/Softbank as we have seen a material ramp in Oracle requirements in the last three months, at a scale we have not seen from Oracle prior."
President Trump last month announced Stargate, a new joint venture between OpenAI, Oracle, and SoftBank expected to invest up to $500 billion in AI infrastructure in the US.
In their Monday note, the analysts concluded, "Microsoft is still active to a degree, although it appears their run-rate data center demand is now lower vs. the torrid pace of leasing seen in 2023 and 1H24, during which time they led the data center leasing league tables amongst hyperscalers."
Microsoft said in Q2 earnings that AI demand is so high that the challenge is having enough data centers. The company plans to spend $80 billion on AI data centers in this fiscal year.
A Microsoft spokesperson told BI this spending "remains on track as we continue to grow at a record pace to meet customer demand."
"Thanks to the significant investments we have made up to this point, we are well positioned to meet our current and increasing customer demand," the spokesperson said. "Last year alone, we added more capacity than any prior year in history. While we may strategically pace or adjust our infrastructure in some areas, we will continue to grow strongly in all regions. This allows us to invest and allocate resources to growth areas for our future."
Microsoft CEO Satya Nadella has previously said that he thinks global productivity and GDP growth are better metrics of AI progress and success than chasing an arbitrary definition of artificial general intelligence, or AGI.
"Us self-claiming some AGI milestone, that's just nonsensical benchmark hacking to me," he said said on an episode of the "Dwarkesh Podcast" that aired earlier this month. "The real benchmark is, is the world growing at 10%?"
Nadella also said that "at some point, the supply and demand have to map" when it comes to AI.
"The classic supply side is, 'Hey, let me build it and they'll come.' I mean, that's an argument, and after all, we've done that, we've taken enough risk to go do it," he said.
However, "you can go off the rails completely when you are hyping yourself with the supply-side, versus really understanding how to translate that into real value to customers," Nadella added.
Though Microsoft has already had its earnings call this quarter, Wall Street will be watching Nvidia's earnings release on Wednesday for any signs of softening AI spending.
