Microsoft’s mammoth AI bet will lead to over $100 billion in data center leases
Microsoft CEO Satya Nadella speaks at a company event on artificial intelligence technologies in Jakarta, Indonesia, on April 30, 2024. Microsoft will invest $1.7 billion to build out cloud computing and artificial intelligence infrastructure in Indonesia, betting on Southeast Asia’s biggest economy to spur growth.
Dimas Ardian | Bloomberg | Getty Images
As Microsoft investors get ready for quarterly earnings this month, there’s one particular metric that’s become increasingly important: finance leases.
A finance lease lets a company pay for an asset over years, rather than all upfront. For companies like Microsoft that are building massive data centers to handle artificial intelligence workloads, shareholders have to get used to some big numbers.
In July, Microsoft told investors in a footnote of its annual report that finance leases that had not yet begun had soared to $108.4 billion, up $20.6 billion from the quarter before, and nearly $100 billion higher than two years earlier. Leases will commence between the 2025 and 2030 fiscal years, and will run for up to 20 years, the filing said.
Overall, Microsoft made $19 billion in capital expenditures in the latest quarter. The total, which includes assets acquired under finance leases, was up from $14 billion in the March quarter and was as much as Microsoft shelled out in the entire 2020 fiscal year.
“It’s an insane ramp,” said Charles Fitzgerald, a former Microsoft manager who writes about capital expenditures on his blog Platformonomics.
Investors will get further clarity on Microsoft’s lease finances when the company reports fiscal first-quarter results in late October. Executives at Microsoft and other top tech companies have approved higher capital expenditures in the past two years, often to boost their performance in generative AI.
Last month Microsoft confirmed its participation in a fund to back the development of data centers and the necessary energy infrastructure, mainly in the U.S. It also signed a 20-year power purchase agreement to restart a reactor at the Three Mile Island nuclear plant in Pennsylvania.
Caught off guard
Microsoft’s higher costs in the June quarter weren’t a surprise to those who heeded finance chief Amy Hood’s guidance from April. She said for the third time in a year that Microsoft was expecting capital expenditures to grow “materially.”
Still, RBC Capital Markets’ Rishi Jaluria was caught off guard by the finance lease figure.
“I’m always on the side that capital leases and capital expenditures are going to be way higher than people think, but they exceeded my own expectations,” Jaluria said. “Frankly, I’m trusting Microsoft here.” A capital lease is another term for a finance lease.
Microsoft has said it achieves the best performance and the best cost when it’s building data centers from scratch. But sometimes the company needs additional capacity immediately, and finance leases can help Microsoft obtain it more quickly.
The pace has been frenetic since OpenAI introduced ChatGPT in late 2022. Microsoft supplies computing power to OpenAI, meaning the startup needs enough servers packed with Nvidia graphics processing units to keep ChatGPT online.
With ChatGPT and other OpenAI services becoming even more popular, Microsoft has signed up additional cloud providers, including CoreWeave and Oracle. UBS analysts wrote in a report in September that comments Hood made in January suggest that Microsoft’s finance leases include the relationships with CoreWeave and Oracle.
Microsoft declined to comment on where third-party cloud partnerships show up on its financial statements.
Jaluria said investors don’t pay attention to backlogs for capital leases. Microsoft doesn’t specify when they will kick in or how long they will last, making them less immediate than in-quarter capital expenditures.
CEO Satya Nadella normally defers to Hood when analysts ask financial questions on earnings calls. But in July, Nadella stepped up when an analyst asked about the strategy of forming partnerships with other cloud providers that supplement Microsoft’s direct data center spending.
“To me it’s no different than leases that we’ve already done in the past,” Nadella said. “You could even say sometimes buying from Oracle may be even more efficient leases because they are even shorter date.”
When it comes to the jump in capital expenditures and future finance leases, Jaluria said investors just have to accept that they will weigh on profitability.
“Naturally, margins are coming down,” said Jaluria, who has the equivalent of a buy rating on the stock. “The cost is here now, and the benefits are not here to offset it. And I think that’s OK.”
Alexandr Wang, CEO of ScaleAI speaks on CNBC’s Squawk Box outside the World Economic Forum in Davos, Switzerland on Jan. 23, 2025.
Gerry Miller | CNBC
Scale AI founder Alexandr Wang told employees in a memo on Thursday that he’s leaving for Meta, confirming reports from earlier in the week about his departure and a large investment from the social networking company.
Meta is pumping $14.3 billion into Scale AI as part of the deal, and will have a 49% stake in the artificial intelligence startup, but will not have any voting power, a Scale AI spokesperson said.
“As you’ve probably gathered from recent news, opportunities of this magnitude often come at a cost,” Wang wrote in the memo that he shared on X. “In this instance, that cost is my departure. It has been the absolute greatest pleasure of my life to serve as your CEO.”
Scale AI is promoting Jason Droege, the chief strategy officer, to the CEO role. Droege was previously a venture partner at Benchmark and an Uber vice president.
A small number of Scale AI employees will also join Meta as part of the agreement, Wang wrote.
A Meta spokesperson confirmed that the company has finalized its “strategic partnership and investment in Scale AI.
“As part of this, we will deepen the work we do together producing data for AI models and Alexandr Wang will join Meta to work on our superintelligence efforts,” the spokesperson said. “We will share more about this effort and the great people joining this team in the coming weeks.”
Meta’s big bet on Wang fits into CEO Mark Zuckerberg’s plans to bolster his company’s AI efforts amid fierce competition from OpenAI and Google-parent Alphabet. Zuckerberg has made AI his company’s top priority for 2025, but has grown increasingly frustrated with his team, particularly as Meta’s latest version of its flagship Llama AI models received a tepid response from developers, CNBC reported earlier this week.
Although Zuckerberg has traditionally placed long-standing employees into high-ranking position, he decided that the outsider Wang would be better suited to oversee AI initiatives deemed crucial for the company.
Scale AI counts a number of Meta rivals as customers, including Google, Microsoft and OpenAI. Meta is one of Scale AI’s biggest clients.
The Scale AI spokesperson said that Meta’s investment and hiring of Wang will not impact the startup’s customers, and that Meta will not be privy to any of its business information or data.
Larry Ellison, Oracle’s co-founder, chief technology officer and chairman, at right, and U.S. President Donald Trump share a laugh as Ellison uses a stool to stand on as he speaks during a news conference in the Roosevelt Room of the White House in Washington on Jan. 21, 2025. Trump announced an investment in artificial intelligence (AI) infrastructure and took questions on a range of topics including his presidential pardons of Jan. 6 defendants, the war in Ukraine, cryptocurrencies and other topics.
Andrew Harnik | Getty Images News | Getty Images
Oracle shares soared 13% on Thursday to a record close, after the database software vendor issued robust earnings and a strong forecast, fueled by growth in cloud.
Revenue climbed 11% year over year during the fiscal fourth quarter to $15.9 billion, topping the $15.59 billion average estimate, according to LSEG. Adjusted earnings per share of $1.70 exceeded the average analyst estimate of $1.64.
“All told, ORCL has entered an entirely new wave of enterprise popularity that it has not seen since the Internet era in the late 90s,” Piper Sandler analysts wrote in a note to clients. The firm was one of several to lift its price target on the stock, raising its prediction to $190 from $130.
Oracle has been making headway in the cloud infrastructure market to challenge Amazon, Google and Microsoft. It’s still small by comparison, with $3 billion in cloud revenue during the May quarter, compared with over $12 billion for Google, which counts productivity software subscriptions and cloud infrastructure sales when reporting cloud metrics. But Oracle’s business is growing faster.
Future expansion can also come from sales of Oracle’s database on clouds other than its own.
“The growth rate in multi-cloud is astonishing,” Oracle Chairman Larry Ellison said on Wednesday’s conference call with analysts. “In other words, our database is now moving very rapidly to the cloud, I think because – a few reasons, because the database has now all these AI capabilities, but also, quite frankly, now people can get it in whatever cloud they want.”
Remaining performance obligations, a measurement of money that’s expected to be recognized as revenue in the future, sat at $138 billion, up 41% from a year earlier. Oracle CEO Safra Catz said RPO will likely more than double in the 2026 fiscal year, which ends in May 2026. Revenue for the new fiscal year should come in above $67 billion, she said. That’s higher than LSEG’s $65.18 billion consensus.
Gains from OpenAI’s Stargate artificial intelligence data center project, targeting $500 billion in investments over four years, are not yet included in forecasts.
“If Stargate turns out to be, everything is advertised, then we’ve understated our RPO growth,” Ellison said.
For fiscal 2029, revenue should be above the $104 billion target the company set in September, Catz said.
Still, the company faces the challenge of meeting client demand in cloud.
“Demand continues to dramatically outstrip supply,” Catz said, though she added that the company isn’t having trouble sourcing Nvidia graphics processing units.
Analysts at RBC, who recommend holding the stock, raised their price target to $195 to $145. But they noted that, “with the backdrop of continued capacity constraints, we struggle to see a path to meaningful acceleration in the near term.”
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