A report by TD Cowen indicating that Microsoft is reportedly slowing down or possibly redirecting its data center construction plans is tied to the company “potentially being in an oversupply position,” analysts with the brokerage say.
Bloomberg reported on Monday that, based on its inquiries to supply chain providers, TD Cowen, a division of TD Securities, had concluded that “OpenAI’s biggest backer has voided leases totaling a couple of hundred megawatts of capacity.” Any pullback by Microsoft, the article noted, raises questions about whether the company is “growing cautious about the outlook for [AI] demand.
Analysts Michael Elias, Cooper Belanger, and Gregory Williams said in the report released Friday that Microsoft has “pulled back on the conversion of SOQs (statements of qualification) to leases and has re-allocated a considerable portion of its international spend to the US. When coupled with our prior channel checks, it points to a potential oversupply position for Microsoft.”
The authors wrote, “it is currently unclear to us if this is simply a delay in SOQ to lease conversion, or if it is an outright termination of the SOQ with no conversion to leasing expected.”
For context, they added, “based on our checks, an SOQ sets forth the terms and conditions for the lease and does not constitute a lease agreement, however the conversion rate of SOQ’s into a signed lease is close to 100%, with data center operators using this as the signal to start data center construction.”
A Microsoft spokesperson said in a statement Monday, “thanks to the significant investments we have made up to this point, we are well positioned to meet our current and increasing customer demand. 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, the company said, “allows us to invest and allocate resources to growth areas for our future. Our plans to spend over $80 billion on infrastructure this fiscal year remains on track as we continue to grow at a record pace to meet customer demand.”
When asked for his reaction to the findings, John Annand, infrastructure and operations research practice lead at Info-Tech Research Group, pointed to a blog released last month by Microsoft president Brad Smith, and said he thinks the company “is hedging its bets. It reaffirms the $80 billion AI investment guidance in 2025, $40 billion in the US. Why lease when you can build/buy your own?”
Over the past four years, he said, Microsoft “has been leasing more data centers than owning. Perhaps they are using the fact that the lessors are behind schedule on providing facilities or the power upgrades required to bring that ratio back into balance. The limiting factor for data centers has always been the availability of power, and this has only become more true with power-hungry AI workloads.”
The company, said Annand, “has made very public statements about owning nuclear power plants to help address this demand. If third-party data center operators are finding it tough to provide Microsoft with the power they need, it would make sense that Microsoft vertically integrate its supply chain; so, cancel leases or statements of qualification in favor of investing in the building of their own capacity.”
However, Gartner analyst Tony Harvey said of the report, “so much of this is still speculation.” Microsoft, he added, “has not stated as yet that they are reducing their capex spend, and there are reports that Microsoft have strongly refuted that they are making changes to their data center strategy.”
The company, he said, “like any other hyperscaler, will need to balance their supply and demand forecasts and at the moment it looks like this is what they are doing. Some of this will have been driven by the Stargate project and OpenAI’s involvement with Oracle and Softbank, but it also looks to be them reallocating capex into different locations.”
He predicted, “overall, the data center buildout for AI and cloud is likely to continue, with all the hyperscalers still spending multiple billions of dollars in datacenter capex.”
The perception that AI demand is in or about to be in a bit of a slump, said Annand, “gives Microsoft the runway to make better long-term strategic decisions. Computing capacity, just like highway construction, obeys the law of induced demand. If not blockchain, then AI; if not AI, then something else. Of course, if quantum really is ready for prime time, then DC capacity will be sold at a fire sale.”
A TD Cowen industry update released on Monday, also from Elias, Belanger, and Williams, stated that aggregate third-party hyperscale data center demand has increased year-over-year among Meta, Oracle/Softbank, and Google, and that Amazon demand “remains consistent.” The analysts wrote that the pullback by Microsoft is related to what they described as a “shift in incremental OpenAI workloads to Oracle/Softbank.”
Source:: Network World