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Microsoft (MSFT -1%) encounters selling pressure today, as shares tag six-month lows, a 10% drop from levels before its Q2 (Dec) earnings report last month, following a TD Cowen report that the tech giant canceled leases for U.S. data center capacity. The report is spurring modest concern among investors today as they question MSFT's move, speculating that it could be due to overcapacity within the AI computing space.

• Today's news is surprising, given MSFT's commentary during its Q2 earnings call last month. At the time, CFO Amy Hood stated that the company would likely be AI capacity constrained in Q3 (Mar) but would balance out to be roughly in line with near-term demand by the end of FY25 due to its sizeable capital investments.
• AI capacity constraints were a common theme among big tech during the current earnings season. Amazon (AMZN) mentioned that AWS could be growing faster if not for some capacity constraints, fueling its significant step-up in CapEx for this year. Meanwhile, Alphabet (GOOG) registered a slight deceleration in Cloud growth in Q4, partly due to capacity constraints. Management noted that it exited 2024 with more demand than it had available capacity, also leading to its increased investment in CapEx for 2025.
  • If MSFT's canceled leases result from a reversal in the trend of limited supply, similar reports could begin to unfold across big tech.
• There is the other possibility that because of Microsoft-backed OpenAI's partnership with Oracle (ORCL) as part of the Trump administration's Stargate venture, where Softbank (SFTBY), OpenAI and ORCL are forming a $100 bln joint venture to fund AI infrastructure, OpenAI could be transitioning its workloads to ORCL.
  • If this scenario is the underlying cause of MSFT's canceled leases, it would be a much less worrisome development. It also would align with the broader commentary from big tech surrounding an environment ripe with AI demand outstripping the current AI infrastructure.

While MSFT pulling back on converting Statements of Qualification into signed leases is stirring up some volatility today, it seems more likely that it has not so much to do with a sudden decrease in AI demand and is more consistent with OpenAI's partnership with ORCL and SFTBY, whereby OpenAI is moving some of its AI workloads to ORCL's servers. MSFT is still planning on pouring $80 bln into its many investments, including AI and cloud infrastructure, up dramatically from the $56 bln spent in FY24, making the cut to an estimated 200 megawatts of data center power not overly concerning. At the same time, AMZN, GOOG, and Meta Platforms (META) are committed to allocating a combined $240 bln to AI infrastructure. Additionally, Alibaba (BABA) disclosed today that it is investing roughly $53 bln in AI. These considerable sums highlight the unwavering demand for the technology in the U.S. and abroad.