Microsoft has cancelled data center leases in the U.S., TD Cowen says

Investing.com-- Microsoft Corporation (NASDAQ:MSFT) has cancelled data center leases with at least two operators in the U.S. and that the company had also scaled back plans for international spending, according to analysts at TD Cowen.

Shares in Microsoft were marginally higher in premarket U.S. trading on Monday.

The cancelled data center leases  amount to “a couple of hundreds of megawatts,” TD said in a note to clients, citing a channel check into Microsoft. A channel check uses information from supply chains and third parties to gauge trends and the health of a company. 

Microsoft appeared to have re-allocated a “considerable portion” of its international spending plans back to the U.S., TD said, heralding a potential scaling back of the company’s international expansion. 

TD said its channel checks also showed Microsoft has scaled back converting signed statements of qualifications into data center leases, although it was unclear if the move was a delay or a termination. A statement of qualification is the pre-cursor to a data center lease.

TD’s channel check showed the company had walked away from several data center deals for over 100 megawatts, let over 1 gigawatt of deals expire, and had walked away from at least five land parcels for more data center capacity. 

TD says cancellations potentially linked to OpenAI, indicate 'oversupply'

Although the analysts flagged that they do not have the "level of color" that they would like into why Microsoft is making the moves, their initial interpretation was that the tech titan may be responding to concerns surrounding possible overspending on its artificial intelligence capabilities.

Like other Big Tech players, Microsoft's AI spending plans have come under intense scrutiny from investors since the emergence of a low-cost AI model from Chinese start-up DeepSeek earlier this year. DeepSeek's model, which reportedly offered performance comparable to Microsoft-backed OpenAI's ChatGPT at a fraction of the cost, raised questions around both necessity of and returns from heavy AI investments.

Data centers have been viewed as a crucial cog in the development of AI, providing the infrastructural backbone on which the nascent technology is trained. Because of that, many companies' spending strategies have included large investments in growing their data center presence.

In January, Microsoft CEO Satya Nadella told analysts that the firm would spend to build out data centers to enhance its AI offerings. Nadella added that he is working to make these servers more cost efficient.

TD noted that the shift in Microsoft’s appetite for more capacity may also be linked to OpenAI, as the start-up appeared to be pivoting towards Japan’s SoftBank Group Corp. (TYO:9984) as a major financial backer. 

OpenAI and SoftBank recently announced Project Stargate, a $500 billion project to build AI data centers in the U.S. Microsoft is also involved in the project. 

Microsoft is by far OpenAI’s largest backer, having started investing in the firm since 2019. The tech giant has largely integrated OpenAI’s models into its software, albeit to limited success with consumers.

In a note on Sunday, analysts at Bernstein said the news flow around the possibly canceled data center contracts could "foretell a sustained slowing" in growth at Microsoft's all-important Azure cloud computing unit. Azure was previously tipped by Microsoft to grow between 31% and 32% in the fiscal third quarter, disappointing analyst estimates.

(Ambar Warrick contributed reporting.)