Microsoft abandons new data center projects in the US and Europe, signaling a potential oversupply in AI data centers, leading to significant stock drops for tech giants like Nvidia and Microsoft.
Overview
On Wednesday, March 26, TD Cowen analysts revealed that Microsoft has abandoned new data center projects in the US and Europe, originally planned to consume 2 gigawatts of power. This decision is attributed to an oversupply of computer clusters supporting AI operations. Analysts also noted that this move reflects Microsoft's withdrawal from some new business ventures with OpenAI.
Key Stock Performance
| Company | Stock Performance |
|---|---|
| Nvidia | Dropped over 6% |
| Microsoft | Fell 1.3% |
| Meta | Declined nearly 2.5% |
| Alphabet (Google) | Fell over 3.2% |
Analyst Insights
TD Cowen's Report
Michael Elias, Cooper Belanger, and Gregory Williams from TD Cowen stated in their latest research report:
"Over the past six months, Microsoft's contraction strategy has included lease cancellations and delays. Meanwhile, Google has taken over some of the leases Microsoft abandoned in Europe, while Meta has absorbed part of the released capacity."
"We still believe that lease cancellations and capacity delays indicate an oversupply of data centers, significantly exceeding current demand forecasts."
Earlier this year, Microsoft and OpenAI revised their multi-year cooperation agreement, allowing OpenAI to use other companies' cloud computing services, provided that Microsoft itself did not need this part of the business.
Market Reaction
The TD Cowen report in February also sparked market attention, making investors uneasy. The report stated that Microsoft had canceled several lease agreements with multiple private data center operators, involving a total power capacity of several hundred megawatts. These actions indicate that Microsoft may be in a situation of "oversupply" of data centers.
As early as last month, the market was concerned that Microsoft's actions might be just the beginning. Given that Microsoft has the largest expected capex growth curve among the "Magnificent Seven" in the US stock market, if it takes the lead in breaking the narrative of "skyrocketing capex," other companies are likely to follow suit quickly. The market cannot help but ask: Was the US stock market's first reaction to DeepSeek correct? Is the AI capex feast driving the US stock market nearing its end?
Microsoft's Response
A Microsoft spokesperson stated in response to TD Cowen's latest report:
"Thanks to the significant investments we have made so far, we are in a favorable position to meet current and growing customer demand. Microsoft added a record amount of capacity last year."
"While we may strategically adjust or slow the pace of infrastructure construction in certain areas, we will continue to maintain strong growth in all regions. This allows us to invest and allocate resources for future growth areas."
Microsoft stated that it will spend about $80 billion to build AI data centers in the fiscal year ending in June, but the growth rate will begin to slow thereafter. Company executives said that after a frenzy of expansion to support OpenAI and other AI projects, spending will shift from new projects to equipping data centers with servers and other equipment.
Spokespersons for Meta and Google did not comment on TD Cowen's research report on Wednesday.
Joe Tsai's Warning
Earlier this week, Joe Tsai, Chairman of Alibaba Group, warned that the construction of AI data centers by US manufacturers may be forming a bubble, with the scale of AI investments by global tech giants reaching hundreds of billions of dollars raising concerns. Large tech companies, investment funds, and other institutions are rushing to establish AI training server bases, a trend that is starting to seem somewhat blind. Many projects are being built without clear customers.
Joe Tsai stated, "I am starting to see the buds of a bubble, with some planned projects starting to raise funds without obtaining demand agreements. When people start building data centers without clear demand, I start to worry. Many people are emerging, and funds are being established to raise billions or even millions of dollars."
Market Reaction
On Wednesday, US stocks fell sharply again, with the Nasdaq 100 dropping over 2% during the session. Nvidia fell over 6%, Microsoft closed down 1.3%, Meta fell nearly 2.5%, and Alphabet (Google) fell over 3.2%.
The financial blog Zerohedge stated that the rollercoaster ride of the US stock market has started again in full swing. Perhaps the most critical factor driving Wednesday's bearish sentiment is the same factor that triggered the sell-off a month ago—the TD Cowen report.
From the market reaction, it seems that investors no longer believe in those once market commanders but are betting on TD Cowen's view—the cancellation and delay of leases indicate that data centers are oversupplied relative to current demand forecasts.
Zerohedge also mentioned that the previously reported Coreweave is rapidly completing its large-scale IPO (the company's valuation is set at $32 billion, possibly raising up to $3 billion in cash). Coreweave's main revenue comes from Microsoft, which recently abandoned a $12 billion computing business option, although reports said that the computing quota was quickly filled by OpenAI."