A brokerage report on Microsoft has caused turmoil among tech investors. TD Cowen’s report, released on February 21, highlighted changes in Microsoft’s data center investment strategy. Microsoft cancels AI data center leases to optimize resource allocation and reduce unnecessary expenses. The report suggested that the company is scaling back and reallocating its spending, leading to a drop in its stock price and losses for energy suppliers linked to data centers.
According to analysts at TD Cowen, Microsoft has canceled data center leases amounting to several hundred megawatts. Moreover, over a gigawatt of agreements have been allowed to expire. The company has reportedly stopped converting qualification statements into formal lease agreements. This strategy mirrors the approach Meta Platforms Inc. took when cutting capital expenditures.
Microsoft shares fell nearly 1% after the report’s release. Companies that supply energy to data centers, including Constellation Energy and Vistra, saw their stocks decline by 5.9% and 5.1%, respectively. The tech-heavy Nasdaq index also recorded a 1.21% drop. The impact extended to Europe, where shares of Siemens Energy and Schneider Electric fell by 7% and 4%, respectively.
Despite these concerns, Microsoft clarified that its AI and cloud investments remain intact. The company reaffirmed plans to spend over $80 billion on cloud and AI infrastructure this fiscal year but noted that some adjustments may be made.
The report also noted a shift in Microsoft’s international spending. More investments are being directed toward the United States, leading to slower growth in global leasing. This move aligns with OpenAI’s recent decision to collaborate with other providers, including Oracle Corp., which may neutralize the impact on third-party data center demand.
AI Investments Under Scrutiny
In October, Microsoft CEO Satya Nadella acknowledged that AI growth faced “external constraints” due to limited data center capacity. He emphasized that building such infrastructure takes time.
Earlier this year, Microsoft confirmed plans to invest approximately $80 billion in AI-powered data centers in fiscal year 2025. More than half of this spending was expected to be concentrated in the U.S. Other tech giants, including Meta, Amazon, and Alphabet, are also increasing AI investments, with combined expenditures projected to reach $320 billion in 2025.
However, some analysts question the scale of these investments, citing uncertainties about real-world AI applications. TD Cowen’s report raised concerns that Microsoft could be in an “oversupply position” regarding data center capacity. Microsoft cancels AI data center leases due to increasing competition from firms like DeepSeek offering cost-effective AI solutions.
Investor confidence has also weakened due to advancements by Chinese AI firm DeepSeek, which has demonstrated AI innovations at lower costs.
Investor Uncertainty Grows
Investors have reacted with skepticism as Microsoft cancels AI data center leases, raising concerns about overinvestment in infrastructure. Skepticism is increasing over the billions of dollars U.S. tech firms have poured into AI infrastructure. A Bernstein analyst suggested that Microsoft’s decision to scale back could signal declining demand, particularly following mixed earnings from major cloud providers. The report also pointed out that Microsoft may have previously overcommitted to leasing data centers and GPU capacity.
DeepSeek’s rapid rise has further fueled doubts about the sustainability of large-scale AI investments. The Chinese startup has showcased AI models requiring significantly lower resources than those developed by U.S. firms. Microsoft’s reassessment of its data center strategy, along with broader market concerns, has put tech investors on edge.
Now, all eyes are on chipmaker Nvidia’s upcoming earnings report. Analysts anticipate slower revenue growth compared to previous years. Last month, Nvidia experienced the largest single-day stock decline in market history, wiping out over $1 trillion in tech sector value following DeepSeek’s AI breakthrough.
