• Microsoft's stock slipped Monday after an analyst note said it was canceling some data center leases.
• The TD Cowen analysts said that may indicate Microsoft is in a "potential oversupply position."
• Microsoft told BI it may "pace or adjust our infrastructure in some areas" but keep growing.

Microsoft's stock slid slightly on Monday morning after an analyst note said that the company had canceled leases for some of its US data centers, which it said suggested AI demand might be lower than the company had expected.

In a Friday note that generated discussion online over the weekend, analysts at TD Cowen published takeaways from their recent channel checks, which often seek out information from a company's supply chain and distribution channels.

"Our channel checks indicate that MSFT has 1) cancelled leases in the US totaling 'a couple of hundred MWs' with at least two private data center operators, 2) has pulled back on the conversion of SOQ's to leases, and 3) has re-allocated a considerable portion of its international spend to the US," the analyst note said, referring to megawatts and statements of qualifications, which often precede lease signings and which data center operators frequently take as a green light on data center construction.

"When coupled with our prior channel checks, it points to a potential oversupply position for MSFT," the analysts wrote. In some cases, Microsoft is "using facility/power delays as a justification for the termination," they added.

The analysts said it was unclear whether the conversion of statements of qualifications to leases was simply delayed or if they were outright terminated. Lastly, the analysts said the reallocated international spending suggested "a material slowdown in international leasing."

Taken together, the analysts said their observations suggested that Microsoft "may have excess data center capacity relative to its new forecast."

Microsoft's stock was down about 2% in Monday morning trading.

In another note, published Monday, the TD Cowen analysts said they believed Microsoft's actions were "related to a shift in incremental OpenAI workloads to Oracle/Softbank as we have seen a material ramp in Oracle requirements in the last three months, at a scale we have not seen from Oracle prior."

President Donald Trump last month announced Stargate, a joint venture between OpenAI, Oracle, and SoftBank expected to invest up to $500 billion in AI infrastructure in the US.

In their Monday note, the analysts said: "Microsoft is still active to a degree, although it appears their run-rate data center demand is now lower vs. the torrid pace of leasing seen in 2023 and 1H24, during which time they led the data center leasing league tables amongst hyperscalers."

Microsoft said in its second-quarter earnings results that AI demand was so high that the challenge was having enough data centers. The company said it planned to spend $80 billion on AI data centers in this fiscal year.

A Microsoft spokesperson told Business Insider this spending "remains on track as we continue to grow at a record pace to meet customer demand."

The spokesperson added: "Thanks to the significant investments we have made up to this point, we are well positioned to meet our current and increasing customer demand. Last year alone, we added more capacity than any prior year in history.

"While we may strategically pace or adjust our infrastructure in some areas, we will continue to grow strongly in all regions. This allows us to invest and allocate resources to growth areas for our future."

Microsoft CEO Satya Nadella has previously said that he thinks global productivity and GDP growth are better metrics of AI progress and success than chasing an arbitrary definition of artificial general intelligence.

"Us self-claiming some AGI milestone, that's just nonsensical benchmark hacking to me," he said on an episode of the "Dwarkesh Podcast" that aired earlier this month. "The real benchmark is, is the world growing at 10%?"

Nadella added that "at some point, the supply and demand have to map" when it comes to AI.

"The classic supply side is, 'Hey, let me build it and they'll come.' I mean, that's an argument, and after all, we've done that. We've taken enough risk to go do it," he said.

But, he added, "you can go off the rails completely when you are hyping yourself with the supply side, versus really understanding how to translate that into real value to customers."

Though Microsoft has already had its earnings call this quarter, Wall Street will be watching Nvidia's earnings release on Wednesday for any signs of softening AI spending.