$ORCL

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Microsoft's decision not to renew its AI cloud computing lease agreement with Oracle and its withdrawal from Nscale projects initially appears to be a strong signal that the AI bubble is beginning to burst. However, looking behind the scenes, the picture is much more complex, and we see that the company maintains its confidence in the demand for AI, simply reshaping its supplier preferences.

The most concrete reason behind Microsoft's move is the aging of its hardware. The agreement with Oracle for an AI-powered version of Bing, signed in 2023, was terminated because the older generation Nvidia GPUs in Oracle servers could no longer meet Microsoft's technical requirements. So this isn't a "withdrawal from AI," but rather a move to get rid of an inefficient resource. Oracle, however, states that demand for these older GPUs remains strong and that they are even extending contracts for these cards with a 20% premium.

The situation is slightly different for Nscale. The main reason for withdrawing from the UK project is the anticipated delays in grid connection to the region, extending into the 2030s. The decision not to renew the agreement in Texas simply means the company is maintaining its existing commitments and not exercising the expansion option. Microsoft is increasingly frustrated by delays and high costs associated with neo-cloud providers, leading it to focus on its own data centers.

How did this affect market prices? As seen in the image, Microsoft shares (MSFT) lost around 2.28% during the day, while Oracle (ORCL) shares saw a sharp rise of 8.86%. This interesting divergence reflects how the market digested the news: Oracle is focusing on its own cloud growth and the increasing demand for artificial intelligence, while Microsoft is taking a more cautious approach.

In fact, fundamental data confirms that the demand for artificial intelligence remains very strong. Microsoft's Azure cloud service experienced growth exceeding expectations at 48%, while the company's performance obligations, representing future contract revenue, increased by 73% to $677 billion. It's safe to say that a company with such a large order book has no tolerance for supplier errors.

In short, Microsoft's move isn't a pause in AI spending, but rather a strategic shift focused on "gaining trust" and efficiency. By investing in its own infrastructure instead of outsourcing, the company is bringing costs forward, but in return, it's increasing operational control and reliability.

In this equation, what would your priority be?

Cost advantage or supplier reliability?

DYOR 🔎 NFA ✔️

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