There are more jitters in the AI sector Wednesday after analysts at TD Cowen highlighted that their channel checks show Microsoft is canceling data center leases in the U.S. and Europe, following up on his earlier finding.

Across the AI sector, AI chip makers NVIDIA (NASDAQ:NVDA) and Broadcom Inc (NASDAQ:AVGO) are each down 5%, while AI server makers Dell Technologies Inc (NYSE:DELL) and Super Micro (NASDAQ:SMCI) are down 3% and 9%, respectively.

Specifically, analyst Michael Elias said that Microsoft (NASDAQ:MSFT) walked away from +2GW of capacity in both the U.S. and Europe in the last six months that was in the process of being leased and has both deferred and canceled existing data center leases in both the U.S. and Europe in the last month.  Elias first warned about Microsoft’s data center activity slowing in February.

The analyst views the pullback as being largely driven by the decision not to support incremental Open AI training workloads.

That being said, they still believe that the lease cancellations and capacity deferrals indicate an oversupply of data centers.

“As such, we believe the lease deferrals are intended to provide Microsoft with a medium-term runway of capacity in major markets to support cloud/inference workloads, with Microsoft canceling leases for capacity that exceeds its updated medium-term capacity needs,” the analyst commented.

On a positive note, Elias said that competitor Google (NASDAQ:GOOGL) is stepping in to backfill the capacity that Microsoft walked away from in international markets.  In the U.S., Meta (NASDAQ:META) is backfilling the capacity.

“The ramp in demand from Google is driven by what we increasingly believe is a global capacity shortfall as its internal demand ramped amid its late August pullback from the market (which we highlighted in September 2024) stemming from an internal initiative to increase the utilization of its existing data center fleet,” the analyst said. “ As for Meta, the demand ramp comes as it is meaningfully increasing its data center capacity in support of Llama.”

On OpenAI, the firm checks indicate that the company is increasingly securing data center capacity directly from third parties, exemplified by its deal with CoreWeave. Additionally, OpenAI has significant long-term capacity ambitions, planning multiple Stargate projects, each ranging from 800MW to 1.5GW, potentially exceeding 6GW in total. To meet these needs, OpenAI is hiring talent from other hyperscalers with expertise in design, construction, and capacity planning, suggesting a move toward self-building data centers in the medium to long term.