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Microsoft Scales Back on Data Center Leases Amid AI Spending Concerns

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Microsoft has pulled back from leasing new data center capacity in the U.S. and Europe, abandoning projects that would have used 2 gigawatts of electricity over the past six months. According to analysts at TD Cowen, the tech giant’s decision is driven by an oversupply of data center capacity relative to its current demand forecast, particularly in light of its shifting approach to supporting OpenAI’s ChatGPT workloads.

Shifting Focus and Market Impact

Investor skepticism has risen regarding the large-scale artificial intelligence (AI) investments made by U.S. tech giants, partly due to slower-than-expected returns and competition from Chinese startup DeepSeek, which offers AI solutions at significantly lower costs. As part of its pullback, Microsoft has decided not to support additional AI workloads, particularly those associated with OpenAI’s ChatGPT, a move that has been closely watched by industry analysts.

Microsoft’s withdrawal from certain data center projects has led to competitors stepping in to fill the void. Alphabet’s Google and Meta Platforms have moved to backfill the data center capacity, with Google focusing on international markets and Meta stepping in for U.S. projects. Despite these shifts, Microsoft remains committed to growing its infrastructure, with plans to invest $80 billion in AI infrastructure during this fiscal year, in line with its ongoing AI strategy.

Continuing Investment and Future Outlook

While Microsoft’s share price saw a slight decline of over 1% on Wednesday, the company reassured investors that its infrastructure growth plans will remain strong across all regions. The company has already scrapped leases with at least two private data center operators, a decision that aligns with its strategic pacing and adjustments to its AI needs.

Executives from both Microsoft and Meta defended their massive AI investments after the reveal of DeepSeek’s cost-effective technology in January, emphasizing that these investments are crucial to remaining competitive in the rapidly evolving AI space. Alphabet has also committed to increasing its AI spending this year, planning $75 billion, a 29% increase over Wall Street’s expectations.

Conclusion

Microsoft’s decision to scale back on data center leases highlights the evolving landscape of AI infrastructure spending, as companies adjust their strategies in response to market competition and changing demand. Despite this pullback, Microsoft’s commitment to AI remains strong, with a continued focus on investing heavily in the technology’s future.

European Investors Demand AI Results by 2025 or Risk Losing Patience

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European investors, while optimistic about the potential of generative AI to boost productivity and profits, are growing impatient with companies that have yet to show tangible returns on their significant investments in the technology. Many are becoming more selective, shifting focus from hardware suppliers to firms that are adopting AI solutions, such as RELX and SAP. However, the pressure is mounting for these adopters to demonstrate clear financial gains from their AI investments by next year.

The AI Boom and Shifting Investor Preferences

AI-exposed stocks, which had enjoyed a surge of interest, have been under pressure recently, particularly due to fears of a recession and the rise of low-cost Chinese AI models, such as DeepSeek. Despite the broader market challenges, Nvidia, a key player in the AI space, has seen a 29% increase in its stock price year-over-year, even amid the rollout of DeepSeek, which reduces reliance on expensive chips like Nvidia’s.

In Europe, the trend is evident as investors move away from hardware makers, with stocks like ASM International and BE Semiconductor down 25% and 20%, respectively, since the January sell-off. On the other hand, companies adopting AI, such as LSEG and SAP, have shown more resilience, with only modest declines in their stock prices.

Investor Patience Running Thin

Despite the growing interest in AI, an internal survey by Fidelity in January revealed that 72% of analysts did not expect AI to significantly impact the profitability of the companies they cover by 2025. Many European portfolio managers are adopting a shorter timeframe, warning that companies need to start delivering visible results by 2026 to justify their AI investments.

Steve Wreford, lead portfolio manager at Lazard Asset Management, emphasized that investors will be more forgiving of AI adopters in 2025, when many companies are still in the beta testing phase. However, by 2026, these companies must show a significant impact on their revenues, or investors will begin to lose patience.

The Risk of Overhyped Expectations

The current high valuations of AI-exposed stocks, including SAP and LSEG, which trade at significantly higher price-to-earnings multiples compared to the broader market, only add to the pressure. Analysts like Bernie Ahkong of UBS O’Connor warn that investors will begin questioning these premiums if substantial returns are not seen by the end of 2025.

One of the key concerns in AI investments, as noted by Paddy Flood of Schroders, is whether viable, profitable use cases for AI will emerge. To sustain investment in the sector, concrete applications of AI must be developed—whether in the form of a single “killer” use case or multiple impactful ones. Fabio di Giansante of Amundi, Europe’s largest asset manager, echoed this sentiment, stressing that AI companies need to demonstrate real benefits in terms of top-line growth and margin improvement.

Looking Ahead

With AI stocks trading at premium valuations, 2025 could be a pivotal year. If companies fail to show a tangible impact from their AI investments, it could prompt a reassessment of their valuations. As the market waits for concrete results, the pressure is on AI adopters to deliver on the high expectations that have been set.

DeepSeek Narrows AI Gap with US, Says 01.AI Founder Lee Kai-fu

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China has significantly closed the artificial intelligence (AI) development gap with the United States, with companies like DeepSeek narrowing the divide to just three months in certain areas, according to Lee Kai-fu, CEO of Chinese AI startup 01.AI. Lee, a renowned figure in AI and former head of Google China, revealed in an interview that Chinese firms, particularly DeepSeek, have enhanced efficiency in chip usage and algorithm application, accelerating their progress.

DeepSeek’s launch of an AI reasoning model earlier this year challenged the assumption that U.S. sanctions were hindering China’s AI growth. The model, trained using less advanced chips, was cheaper to develop than its Western counterparts, shaking the global AI industry. Lee pointed out that previously, the gap between China and the U.S. was six to nine months, but now it has narrowed to just three months in some core AI technologies. In specific areas, Chinese companies have even surpassed their Western rivals.

Despite U.S. sanctions on semiconductors, which initially posed challenges, Lee believes that these constraints have driven Chinese companies to innovate. He noted that DeepSeek’s new approach to reinforcement learning—a technology that shows users the reasoning process before delivering answers—demonstrates this innovation, now on par or even ahead of U.S. developments.

Lee also highlighted that China’s tech sector, initially seen as trailing in AI development, rapidly entered the generative AI race after OpenAI’s ChatGPT launch in late 2022. With startups like DeepSeek and 01.AI entering the field, China’s AI capabilities have gained global attention.

Lee’s 01.AI, which he founded in 2023, focuses on practical AI applications rather than developing proprietary foundational models, aiming to help enterprises deploy AI solutions efficiently. The company launched Wanzhi, a software platform, earlier this month to assist businesses in integrating AI technologies, already generating revenue and forecasting substantial growth for 2025.