A lease pullback raises questions about whether the company is growing cautious about the outlook for AI demand
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.
“While we have yet to get the level of colour 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.
“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 US$80B on infrastructure this fiscal year remains on track as we continue to grow at a record pace to meet customer demand.”
Critics have consistently pointed out a dearth of practical, real-world applications for AI, even as Microsoft, Meta and Amazon.com Inc. have pledged to spend billions on the data centres 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 U.S. technology at a fraction of the cost.
All About DeepSeek and Its Lower-Cost AI Model
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 centres required to fuel power-hungry AI services.
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 centre 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 Platforms Inc. previously employed when curbing capital spending, the firm wrote.
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 US$100 billion, and possibly US$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.