WSS: Questions around sector’s status continue to swirl as hyperscalers said to be pulling back from leases, infrastructure builds; but is it real?
The sector continues to see developments that raise questions about the sector’s status and whether there is a bubble, glut or overbuild situation emerging. First it was DeepSeek and now there is chatter that Microsoft and possibly other hyperscalers have pulled back on leases and infrastructure procurement because demand may not be quite what people are expecting and the possibility that overconfidence has led to excessive consumption and an oversupply situation. The stakes these days are high, and it sometimes seems like everyone wants to assume the worst. That can be the case if you take just a cursory glance at the issues. But upon closer inspection, there are a number of plausible explanations that should cast enough doubt and engender confidence that the worst case scenarios are unlikely to transpire.
Earnings season provides evidence that things are on the right track and paint a picture of a healthy sector on stable footing. We have already seen the hyperscalers report, and this week we took a look at one more hyperscaler – Alibaba Cloud – also trending in the right direction. In the next tier, Cloudflare continues to push forward, and data centre operators like Digital Realty and Equinix continue to perform well even as they accumulate scale and deal with a complicated landscape. The emerging AI world has added new listed companies to our ecosystem-oriented coverage. We delved into the energy companies last week and this week, we looked at the preliminary results coming from Northern Data Group, which is the business of GPU cloud and data centre colocation. Growth in this emerging market is gathering momentum and Core Scientific is another of these companies (and also publicly listed) that is adding new markets to its footprint. The hyperscale earnings reports all included disclosures and commentary around CapEx at a time when many are worried about an oversupply situation. AWS, for example, is set to spend $100b in CapEx in 2025. And MIcrosoft felt compelled to confirm that it will not adjust its CapEx projections for FY25 amid the chatter that it was pulling back on leases and possibly cutting infrastructure spend to address an oversupply situation. In short, an overbuild does not seem to be on the horizon and we explain in our commentary some of the possibly reasons why.
Speaking further to the sector’s health, there were a number of strategic developments as investors continue to back the sector and push expansion on a global basis. Iron Mountain continues to invest in global markets and closed the acquisition of a minority stake in Ooredoo’s data centre arm MENA Digital Hub. MENA is based in Qatar and serves markets across the emerging MENA region. Meanwhile, investor confidence remains high and expansion projects continue to move forward, and capital is flowing into the sector to support it. T5 Data Centers is building big in multiple US markets and its investor QuadReal injected more capital to support these efforts, while PointOne is building in Virginia and brought in an undisclosed investor to support the sites it has assembled. Finally, on the GPU cloud side, Lambda raised almost $500m in a Series D round as it looks to also expand into international markets and build out infrastructure to house its GPU cloud service.
Another development of interest we saw in the past week came out of Japan. Japan Display is shutting down its LED screen fabrication plant in Tokyo and looking to convert it into an AI-oriented data centre. The same happened to another LED fabrication facility last year in Osaka. The conversion of manufacturing and industrial sites to data centres is nothing new and of course, not unique to Japan. QTS was early to identify industrial sites and did this in Atlanta with a former semiconductor manufacturing facility. We have also seen newspaper production plants shut down and converted into data centres in a number of markets. The shift to the digital world is reflected in data centre development. Newspaper printing and shopping malls have given way to online publications and Amazon’s e-commerce site, and they need data centres to run them. E-commerce has left traditional retailers of the old economy in the dust and once iconic names like Sears also have let their HQs be taken over by you guessed it: data centre developers. Compass Data Centers, for example, is building a data centre campus outside Chicago in Hoffmann Estates where Sears used to have its HQ. The conversion is symbolic of this transition from the old world to the new, but also makes a lot of sense given that the drivers of a good data centre site are present (land, power, connectivity, transportation links, etc.).
The past week also saw us publish our monthly insight notes. We addressed some of the themes mentioned above around earnings season, Microsoft and possible oversupply and CapEx increases, and touch on M&A, edge-hyperscale and AI inferencing.
or