Investing.com -- Microsoft’s recent cutbacks on early-stage data center projects have sounded the alarm on AI demand, but UBS isn’t convinced and chalks it up to the tech giant finally getting a grip on its data center needs after a leasing binge.
“Microsoft bought up as much available leased data center capacity as it could in 2022-2024 and now has the visibility to eliminate some of these “early-stage projects,” analysts at UBS said.
Microsoft Corporation (NASDAQ:MSFT) recently said it is “slowing or pausing” some of its data center construction, including a $1 billion project in Ohio.
While some were quick to point fingers and warn of waning AI demand, the mountain of cash that Microsoft intends to deploy suggests the AI boom is far from over.
The high revenue outlook of AI at around "2.5 years when GPU pricing also needs to cover non-cash depreciation and when the useful life is trending down to perhaps 5 years strikes us as reasonable but not yet outstanding unit economics,” the analysts said.
In the very early stages when the promise of the technology was sky-high but the visibility was murky at best, spending big on AI was key to stay in the AI race. Microsoft went on a data center leasing spree, increasing its leased data center capacity by 196% in FY24 and now is on track to be up another 125% in FY25, the analysts added.
While the headlines that scream "AI slowdown" Microsoft’s data center adjustments represent a tempering of capex growth rather than an AI “demand lull,” UBS said.
The waning AI demand pedalled by some, meanwhile, isn’t likely to show up Microsoft’s quarterly report as UBS expects the tech giant is expected to “reaffirm its FY26 capex guide (not lower it)”