Microsoft Forecasts Show Data Center Crunch Persisting Into 2026

0:28The news doesn't stop on the weekends. We put the past week's events into context, examining what happened in the markets and the world. Then on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television, listen on Bloomberg Radio, stream the show live on the Bloomberg Business app, or listen to the podcast. That's Bloomberg this weekend, Saturdays and Sundays starting at 7 a.m. Eastern on February 28th. Make us part of your weekend routine on Bloomberg Television, Radio, and wherever you get your podcasts.

1:10Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. Speaking of technology, a piece of news that I thought was really interesting, Scarlett, Microsoft saying, hey, we're not going to have as much, I guess, data center capacity as we thought. And we're not going to have as much as we need until maybe sometime next year. It's just another data point that, as Jay was just pointing out, there's lots of ways to play AI.

1:50Money's being spent all throughout the economy, not just the tech stack. But there's still logjams nonetheless. Yeah, still logjams nonetheless. So let's see what's going on with our good friends at Microsoft. Anurag Rana joins us, technology analyst for Bloomberg Intelligence. Again, what do you make of this Microsoft news, Anurag, that they say, you know, data center crunch is going to persist into 2026? Yeah, you know, Microsoft talked about a little bit of this in the earnings call about, let's say, 12 months ago. And then they said things are easing or things are improving. And it does have an impact on their cloud business growth rate when things are tight.

2:26Now, this news, I think it was an excellent article written by Bloomberg News. And, you know, it gives us a lot of things to think about as to what's going to happen over the next 12 to 18 months. We think CapEx could go up. We think cloud realization of the rates could go down. And, you know, the AI boom is going to continue or the AI infrastructure boom is going to continue. Because if Microsoft needs more capacity, it's going to go to people like CoreWeave, Nebius, Oracle. They're going to go to their, you know, companies that they work with to create the data centers. and the downstream effect of that.

2:58So positive news for the infrastructure space, but maybe has an impact on Microsoft's cloud growth rate. Does it have an impact on Microsoft spending as well? And how will that show up in the earnings when the company reports? Yeah, I think it can have an impact on their gross margins. You may see a tick down. They have said that the next financial years, the next fiscal year, they're going to spend more on CapEx than last year, but the rate of growth is going to go down. Now, they haven't given any figures, so you can drive a big truck in that particular range because they are giving themselves the flexibility to say that.

3:34One could argue that the year after that, now maybe they're going to spend even more. So that really has an impact on the entire cycle. So that means Oracle has to spend more. That means Meta has to spend more. Amazon has to spend more. And that continues this big boom of all the downstream companies, we have anything from chips to data center cooling and water, et cetera. What inning, Anurag, do you think we are in this AI tech build out? I think we're in fairly early innings because unlike software coding, or you could say the build out of a new e-commerce website, this one's going to take some time because every data center It takes a long time to come up.

4:20I mean, from breaking ground, getting permits, to getting power, to actually building it and putting it together. I mean, it takes a few years for that to build out. So I do not see any reason why in five to seven years we'll still not be talking about this topic. You know, when we come back to this data center crunch for Microsoft, is this a zero-sum game where it's Microsoft's loss for now in the short term as it builds these things out and its competitors gain? And if so, what are the names that are likely to be most able to benefit? No, I don't think it's anybody's gain in this point. So the crunch that they are having, I bet the same thing is happening with Google, same thing is happening with Meta and Amazon.

5:03They are all going out to these third-party NeoCloud providers to see wherever they can find capacity. And at the end of the day, whoever has any capacity left, you know, they will find a customer from one of these large vendors. because not only what they're doing is selling products to the third parties outside, their internal processes, they are actually improving it as well. Somebody like a Meta, they really are improving their ad business because of AI and they need more capacity because of that as well. Earnings will be kicking off the season next week for the banks and then we'll get the tech companies a little bit later.

5:39What are you going to be listening for, Anurag, during this earnings cycle for your tech names? It's a big tale of two cities. One side, we're going to see an actual drop in discretionary spending. So any of the consulting names, they're not going to have a good time. Any of the traditional software names, even SaaS names, they're not going to have a good time because subscription growth is going to slow down. But on the other side, you know, somebody like a CodeWeave or an Oracle or a Microsoft, they will talk about more bookings. Oracle is not going to report in this particular running season.

6:13But a month after that, I think they will all see a good increase in the backlog or the order book. But the rest of the space, I think, is going to struggle. Once upon a time, a lot of the companies benefited from the end of the year rush to use up the IT budget. You know, every company had a certain amount of money allotted to spending on IT. And a lot of times companies didn't get around to using it until the fourth quarter. And then they would do so in a big rush. Do you see that happening this time around? Yes, it would happen, but only happen on the AI side of things. The non-AI side of the tech spending, I think that's still going to struggle.

6:50We may not have a resolution of that till the global macro environment improves, till we have a resolution between US-China trade war? Did we know what's happening to interest rate? I think that part of the equation is going to struggle.

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8:11You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, let's turn now to a sector that, of course, is affected by tariffs directly, and that is the auto sector. Steve Mann is Bloomberg Intelligence Global Autos and Industrials Research Analyst, and he joins us now to talk about Stellantis. Stellantis, it's Chrysler, right, Paul? Jeep, Chrysler, all those good brands. Okay, I always get confused because I see Stellantis.

8:46I'm like, what car company is this? I don't get it. In any case, its third quarter shipments climbed to 13 percent, led by a rise in North America. So there is a bit of a recovery here after the carmaker has been working down inventory in the U.S. Steve, thanks for joining us. Let's talk a little bit about Stellantis and how sensitive, vulnerable it is to President Trump's tariffs. Yeah, I think they are very sensitive to tariffs. But I think a lot of the impact on companies like Stellantis and the Detroit Trio is really their operations in Mexico and Canada. I think Trump is looking for them to actually move some of those production back into the U.S.

9:28and employ more U.S. workers. So, I mean, there's been a lot of rhetoric and a lot of, you know, potential changes. Changes are impending. But I think for now, auto tariffs, it's been pretty quiet. And I don't think, you know, the Trump, you know, the tweets are going to impact the Detroit three. So where are we in terms of implementing tariffs on autos just incoming and coming in the U.S.? Where are we actually being levied at the moment? Yeah, it's happening at the moment. We've heard a lot of news on companies moving production back to the U.S. GM have moved some of their Silverado production, one of their highest profit vehicles from Canada back to the U.S.

10:21So we're hearing that from Ford and some other automakers. Hyundai is investing a lot in the U.S., likely to move some of the production from South Korea into the U.S. So we are already starting to hear and see the effects of those auto tariffs. Steve, this might be an unanswerable question, but with companies making the moves to do that, this will take a long time. This is a multi-year process, right? You don't just decide that you're going to reshore manufacturing. It happens the next day. Is just saying that you're going to do that enough to appease the administration? Well, I look at it as a two-phase process.

11:01there's what I call low-hanging fruits. So, you know, for example, I gave earlier on the Chevrolet Silverado that GM shifted back to the U.S. You know, if they have spare capacity in the U.S., that's a no-brainer. They can shift that back quickly. But you're absolutely right. You know, longer term, it's going to take years to kind of unravel the North American supply chain to focus more in the US. It's going to take years because you know plants take years to build and you also have to bring back the suppliers. The suppliers rather produce their parts near the manufacturing, near the assembly plants rather than you know other you know in other countries where you know shipping costs could be very high.

11:50So it could take if not years a couple of decades to actually turn that ship around. So where is Stellantis just from a positioning perspective right now relative to the other automakers out there? Yeah, Stellantis has been losing quite a bit of market share on their higher profit vehicles like the Ram trucks, the Jeeps. And with the new CEO coming on board, the strategy has shifted from more of achieving cost savings from the mergers that created Stellantis back in 2001 to more of an outreach. You know, how are we going to, how are they going to answer the demands of the consumer? They really want the V8 back, which is what they're doing.

12:41They're bringing that V8 Hemi back. And, you know, they're also bringing the midsize Jeep Cherokee back, which has been very popular with consumers. Stay with us. More from Bloomberg Intelligence coming up after this.

13:21frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts.

13:51Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk about the consumer here. How's the consumer doing out there? There's lots of ways you can kind of get a sense for that. We talked to Mike Halen from Bloomberg Intelligence about how the restaurant traffic is doing. And we also can talk to Lindsay Dutch. She covers the consumer hard lines retail companies. She's a senior analyst at Bloomberg Intelligence. Lindsay, let's talk like, I don't know, Dick's Sporting Goods, Ulta.

14:27You've got a couple of companies that are going to be reporting earnings coming up. And what do you expect from these companies? Yeah, thanks, Paul, for having me. We are taking a look at sort of full year guidance going into the third quarter earnings. And, of course, that important holiday shopping season. And what we've noticed is, you know, the guidance ranges are very, very wide for these retailers. It's baking in a lot of uncertainty surrounding the consumer. But when we look at the demand trends and sort of first half results, first half results were pretty solid for many of these hardline retailers.

15:01And we're seeing better demand in the beauty space, you know, better demand for electronics even and home furnishings, some categories that have really been struggling. And when I look at this guidance range, I sort of think that we might be able to trend sort of towards the middle, upper half of the range if that demand can hang on through the second half into 2026. Can that demand hang on if prices increase or the supply is limited? We're hearing again in these headlines from President Trump that there could be a massive increase of tariffs on goods from China. Dick's Sporting Goods, Ulta Beauty certainly do rely on China for their supply chain.

15:40So I'm curious whether that gets folded in. So I think when we think about the second half, I think a lot of that inventory is already in place. And there have been price increases that have occurred on that inventory. We're expecting to see that. We do think the shopper is going to come out a lot like they did last year, selective, value focused, but they're still willing to spend, you know, on certain things. And I think that, you know, the key draw there is, you know, anything that's new, Nintendo Switch 2, you know, anything exclusive or like a premium type product, you know, which does skew to a Dick's sporting goods.

16:18I think when I think about the risk, you know, of these headlines that we're seeing, you know, Best Buy, you know, is responding to those headlines. I think if we see a big, much higher levy on goods from China, you know, that's something that they're going to have to address in the 2026 year. they have significantly reduced their exposure. You know, of those hard lines names we were talking about, Best Buy is probably the most exposed, 33 % of COGS, but it's all indirect exposure. So it's not stuff that they're directly importing. It's just some of the inventory that they have on hand. Lindsay, the companies you cover, the hard line retailers, what's their, I don't know if they have a collective view of how the consumer's doing out there.

17:00What are they telling you guys? Yeah, again, I think what we've seen, and this is sort of going back all the way to last year's holiday season, is that newness is driving demand, and that's no matter what the category. So like beauty, electronics, we saw explosive demand for that Nintendo Switch 2. But even in the sporting goods market, you know, new product or a premium type product is really drawing that consumer in, even if it's a higher price point. So consumers are definitely value focused, but they're making sacrifices. They're choosing to shop value on certain things, and then they're splurging on other things.

17:43It's really hard to discern. But like I said, we've seen improvement broadly in the home furnishings category, also in electronics. And then beauty, which kind of took a leg down last year, is looking a lot better this year. Lindsay, talk a little bit about these companies and their efforts to make sure that the consumer stays with them no matter what happens, even if they can go to, say, TJ Maxx and get it for cheaper because they have these loyalty programs that tie the consumer so closely to their brand, And even as an aggregator, Dick's Sporting Goods does not sell its own branded merchandise.

18:18It sells Nike. It sells New Balance. But people go back repeatedly to the store. Right. Yeah, those loyalty programs, you know, for the retailers are great because that gives them a lot of data on their customers that shop the most with them. You know, I think this is where, you know, assortment matters and exclusives matter. So, you know, Dick's smaller pier, Academy Sports, they have not seen the growth that Dick's is seeing. And it's because they also carry Nike, but they might not carry the brand new Nike basketball sneakers for the season, whereas Dick's does. So the assortment, you really have to dive in and look at very specifically, you know, what some of these retailers have.

19:00They have to have that newest product. They have to have, you know, exclusive items where you can't go elsewhere to get it. And that is really key to keeping that customer back. I also think, you know, when you have a positive experience shopping at a retailer, you know, you're going to go back to them as well for that customer service or whatever it is that they're providing to you that no one else can give you. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business app.

19:39You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

19:48Hello, I'm Michelle Hussain, and for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day. To spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage, to tech journalist Kara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run-up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to The Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts.

20:41You certainly ask interesting questions.