TD Cowen sees GOOG, META benefit from MSFT lease cuts

On Wednesday, TD Cowen analysts provided insights into the latest developments in the tech sector, particularly affecting Alphabet (NASDAQ:GOOGL) Inc.’s Google (NASDAQ:GOOG) and Meta Platforms Inc. (NASDAQ:META) following Microsoft Corporation’s (NASDAQ:MSFT) decision to cancel and defer data center leases. Microsoft, currently valued at $2.93 trillion, has demonstrated strong financial management with a healthy balance sheet and moderate debt levels, according to InvestingPro data. The analysts observed that despite Microsoft’s actions, which were more extensive than initially anticipated, overall data center demand has seen a year-over-year increase. This trend has created opportunities for Google and Meta to fill the capacity void left by Microsoft in various international and U.S. markets, respectively.

The analysts noted that hyperscalers, including Google and Meta, are ramping up their data center demand significantly. Google’s demand is driven by a global capacity shortfall, which became evident after the company pulled back from the market in late August 2024 to enhance the utilization of its existing data center fleet. Meta’s increased demand is in support of its project ’Llama,’ signaling a robust year-over-year expansion in data center capacity requirements.

Microsoft’s lease cancellations and deferrals, according to the analysts, are indicative of a data center oversupply relative to its current demand forecast. This strategic move by Microsoft is seen as a way to manage its medium-term capacity needs in major markets, focusing on cloud and inference workloads. With revenue growth of 15.04% over the last twelve months and strong cash flows, Microsoft appears well-positioned to optimize its infrastructure investments. InvestingPro analysis reveals 14 additional key insights about Microsoft’s financial position and growth prospects. The lease cancellations are for capacity that surpasses its revised medium-term needs.

The analysts also highlighted OpenAI’s growing presence in the data center market. OpenAI has been procuring capacity directly from third-party operators and has ambitions for long-term data center capacity, with plans for multiple ’Stargate’ projects that could require over 6GW of cumulative long-term capacity. OpenAI is also reportedly hiring experts from other hyperscalers, which could signal a shift towards self-building its data centers in the future.

However, the report also mentioned a slowdown in data center equipment ordering due to hyperscalers redesigning their data centers to support higher rack densities. This redesign process, particularly led by Nvidia (NASDAQ:NVDA)’s evolving technology, has delayed purchasing decisions and pushed equipment orders out by several quarters. Microsoft’s strong financial health score of 2.96 (rated as GOOD by InvestingPro) and robust gross profit margin of 69.41% suggest it’s well-equipped to navigate this transition period. For detailed analysis of Microsoft’s financial metrics and future prospects, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers. Consequently, this is expected to negatively impact Vertiv’s order volumes in the first half of 2025, as data center operators wait to place orders until new designs are finalized and due to existing equipment warehousing efforts by third-party operators.

In other recent news, OpenAI is reportedly considering a significant investment in data storage hardware and software, potentially building its own data center to support this initiative. This move could reduce OpenAI’s reliance on external cloud providers like Microsoft, Oracle (NYSE:ORCL), and CoreWeave, and may serve as a cost-saving measure. The potential storage purchase is linked to the Stargate data center initiative, which involves a $500 billion investment with SoftBank (TYO:9984). Meanwhile, OpenAI is also expanding the role of its Chief Operating Officer, Brad Lightcap, as CEO Sam Altman focuses more on technical aspects. This shift in leadership roles includes the promotion of Mark Chen and Julia Villagra to Chief Research Officer and Chief People Officer, respectively.

Microsoft remains in focus as Piper Sandler reaffirmed its Overweight rating on the company, maintaining a price target of $520.00. Analysts highlighted Microsoft’s robust commercial Remaining Performance Obligation and substantial annual operating cash flows as strengths. They also noted the strategic importance of Microsoft’s AI business, which is rapidly growing and valued at over $13 billion. Additionally, discussions around Microsoft’s Azure platform suggest its competitive positioning in the cloud services market, despite skepticism about AI’s ability to drive main workloads independently. These developments reflect ongoing strategic initiatives at both OpenAI and Microsoft, offering insights into their future directions.

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