Shares in Microsoft (MSFT) were lower today on reports that it may have exaggerated its AI potential after scrapping plans to build at least two more data centers. A report from analysts TD Cowen stated that OpenAI’s biggest backer had canceled leases in the U.S. for around 200 megawatts (MW) of capacity. That’s roughly the power needed to run two data centers.
Potential Problem of Oversupply
TD Cowen added that the tech giant had “pulled back on converting so-called statements of qualifications, agreements that usually lead to formal leases.” TD Cowen analysts Michael Elias, Cooper Belanger and Gregory Williams wrote: “While we have yet to get the level of color 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 suggested that a potential pullback could be because “OpenAI is shifting workloads from Microsoft to Oracle Corp. as part of a relatively new partnership.”
Whatever the reason, if Microsoft is canceling leases then this could raise questions over whether it has become more cautious about AI demand. Microsoft was expected to spend $80 billion this financial year on data centers.
Microsoft: “No Change of Plan”
Microsoft, according to a Bloomberg report, responded by reiterating its spending target but not commenting on TD Cowen’s note. However, in a Mizuho note today from analyst Jordan Klein it cites a quote from Microsoft’s IR team which said: “There’s no specific change to our capacity strategy that we would flag. We think of leasing as a part of our strategy that can provide benefits such as speed of delivery and flexibility. We have CapEx plans, and we adjust those based on various factors as we go through the year. We will continue to do that and expect leasing to remain a component of our overall capacity strategy.”
Klein was left unflustered. “To me this all looks and sounds like business as usual. A company this large has the right to move in and out of data center leases, many of which were never officially signed. All large cloud hyperscalers do the same thing,” he said.
Is MSFT a Good Stock to Buy Now?
On TipRanks, MSFT has a Strong Buy consensus based on 29 Buy and 3 Hold ratings. Its highest price target is $600. MSFT stock’s consensus price target is $510.38 implying an 26.54% upside.
