AI hype and data-center capex have been main market drivers previously 12 months however there’s some angst these days about how a lot is being spent and whether or not there’s a actual enterprise case for all of it. That basically kicked off with DeepSeek undercutting value assumptions and now there’s a TD be aware doing the rounds suggesting that Microsoft is pulling again on spending.
I’ve printed the textual content of the be aware beneath.
Our channel checks point out that $MSFT has 1) canceled leases within the US, totaling ‘a few hundred MWs’ with at the very least two non-public knowledge heart operators, 2) has pulled again on the conversion of 500’s to leases, and three) has re-allocated a substantial portion of its worldwide spend to the US. When coupled with our prior channel checks, it factors to a possible oversupply place for MSFT.
Our Channel Checks Point out Microsoft Has Cancelled Choose US Knowledge Heart Leases and Has Pulled Again on SQQ To Lease Conversion; Pulls Again on Worldwide Market Enlargement.
Our current channel checks point out that Microsoft has terminated choose leases with at the very least two non-public knowledge heart operators throughout a number of U.S. markets, totaling a few hundred MW. Our checks point out that in some conditions, Microsoft is utilizing facility/energy delays as a justification for the termination. Recall, as we highlighted in our 2022 Takeaways from PTC, this is identical tactic that Meta used to cancel a number of knowledge heart leases within the U.S. after we realized in our checks that Meta had then canceled a $48B capex program associated to the metaverse (Meta subsequently minimize its capex steering by $5.4B two weeks later).
Individually, our channel checks counsel that Microsoft has additionally pulled again on changing negotiated and signed Assertion of {Qualifications} (500’s) (the precursor to a knowledge heart lease) into signed leases. Up to now, it’s at the moment unclear to us if that is merely a delay in 500-to-lease conversion or whether it is an outright termination of the five hundred with no conversion to leasing anticipated. For context, primarily based on our checks, a 500 units forth the phrases and circumstances for the lease and doesn’t represent a lease settlement. Nonetheless, the conversion fee of 500’s right into a signed lease is near 100%, with knowledge heart operators utilizing this because the sign to begin knowledge heart building. As well as, our channel checks point out that Microsoft can be re-allocating a substantial portion of its projected worldwide spend to the U.S., which suggests to us a cloth slowdown in worldwide leasing.
Why is that this taking place?
Whereas we’ve but to get the extent of colour by way of our channel checks that we want into why that is occurring, our preliminary response is that that is tied to Microsoft doubtlessly being in an oversupply place. As we highlighted in our current takeaways from PTC, we realized by way of our channel checks that Microsoft:
1. Walked away from a number of 100MW offers in a number of markets that had been in early/mid-stages of negotiations.
2. Let +1GW of LOIs on bigger footprint websites expire.
3. Walked away from at the very least 5 land parcels that it had underneath contract in a number of Tier I markets.
On the time, we additionally highlighted that the magnitude of each potential knowledge heart capability it walked away from and the choice to drag again on land acquisition (which helps core long-term capability development) in our view signifies the lack of a serious demand sign that Microsoft was initially responding to and that we believed the shift of their urge for food for capability is tied to OpenAI, which current press stories seem to verify.
To that time, think about this: Microsoft was probably the most lively lessee of capability in 2023 and 1H24, at which era it was procuring capability relative to a capability forecast that contemplated incremental OpenAI workloads. Nonetheless, as we imagine is indicated by its resolution to pause building on an information heart in Wisconsin—which our prior channel checks indicated was to help OpenAI—there’s capability that it has doubtless procured, notably in areas the place capability shouldn’t be fungible to cloud, the place the corporate might have extra knowledge heart capability relative to its new forecast.
That is our interpretation of the present scenario, nonetheless, our view is topic to vary as we conduct incremental channel checks.”
There may be has lengthy been some angst about AI spend slowing down and indicators the ‘bubble’ is deflating. Nonetheless distinction this with what CEO Satya Nadalla said in a podcast this week.
So I feel there are two locations the place I can say with some confidence. One is the hyperscalers
that do effectively, as a result of the basic factor is in the event you kind of return
to even how Sam and others describe it, if intelligence is log of
compute, whoever can do a lot of compute is an enormous winner.
So the truth is it is manna from heaven to have these AI workloads
as a result of guess what? They’re extra hungry for extra compute, not only for
coaching, however we now know, for check time. While you consider an AI agent,
it seems the AI agent goes to exponentially enhance compute
utilization since you’re not even sure by only one human invoking a
program. It is one human invoking applications that invoke heaps extra
applications. That is going to create huge, huge demand and scale for
compute infrastructure. So our hyperscale enterprise, Azure enterprise, and different hyperscalers, I feel that’s an enormous factor.
There are additionally some indications round a breakup of the Microsoft and OpenAI partnership.
It is powerful to inform what’s true and what’s true and what’s common churn right here however there’s sufficient noise round this so as to add to the angst early this week.
