Microsoft is narrowing its neocloud partner roster, concentrating spending on fewer third-party AI infrastructure providers while building out its own data centers, as sector stocks remain under heavy pressure following post-midterm sell-off fears.
Microsoft is narrowing its roster of neocloud partners, opting to concentrate spending on a smaller group of key suppliers while accelerating the buildout of its own data centers, according to people familiar with the matter.
The software company has worked in recent years with roughly half a dozen neoclouds, including CoreWeave, Nebius, Chronoscale, IREN, Lambda, and Nscale, as well as Oracle, which has been pouring capital into AI infrastructure. Microsoft is now in an evaluation phase and has not yet decided which partners it will stop using, two sources said, speaking on condition of anonymity because the discussions are confidential.
One source said Microsoft's priority is to expand its own data center footprint. A Microsoft spokesperson said in an emailed statement that its infrastructure strategy is "built on flexibility and choice," adding that the company "regularly reviews these investments against customer demand."
"We combine Microsoft-owned datacenters, leased facilities and strategic partnerships with third-party providers to deliver the capacity our customers need, where and when they need it," the spokesperson said. "The pace of our new agreements reflects what we need today."
Microsoft has already reduced its relationship with U.K.-based Nscale, walking away from a site it had intended to use in England over concerns about the provider's ability to secure electricity access, Darren Hardman, Microsoft's CEO for the U.K. and Ireland, told CNBC in October. The Financial Times reported this week that Microsoft also declined to renew a contract with Nscale in Texas. Separately, two people said Microsoft opted not to renew a deal with Oracle.
The move comes as neocloud stocks have been battered in recent weeks. Shares of CoreWeave, Nebius, and IREN are all down roughly half over the past month, even after recovering some ground on Friday. A recent industry review counted 323 neoclouds, and analysts have predicted many will not survive. IREN shares rebounded approximately 19% Friday after the company reported that fiscal first-quarter AI revenue of $200 million more than doubled from the prior quarter.
IREN co-CEO Daniel Roberts acknowledged the pressures in an earnings call. "Capital markets have become more selective in the last few weeks, and the questions have undoubtedly moved from how big the contract is to whether it can be delivered, financed, and run at a profit," Roberts said. He also said there is a "disconnect between what we're seeing in public market and what we're seeing at the customer level."
The neocloud sector's difficulties are unfolding against a broader market turbulence triggered by the U.S. midterm elections. A Democratic sweep of Congress and many governorships Tuesday prompted a sharp sell-off Thursday, with major indexes posting their worst single-day decline since April 2025. Investor fears centered on a potential slowdown in data center construction following wins by candidates favoring data center regulation in states including Texas. The "Magnificent Seven" technology stocks lost over $1 trillion in aggregate market cap on Thursday before markets partially recovered Friday.
Tech executives pushed back on the severity of those fears. Arm CEO Rene Haas called the post-election concern "very, very short term thinking," warning that "if the U.S. hesitates in any way, shape, or form in terms of data center build-out, the rest of the world is ready and willing." OpenAI CFO Sarah Friar said the company will continue investing in data center infrastructure regardless of the election outcome. "When I think about the midterms, I need to keep thinking about how do we keep investing to meet that customer demand," Friar told CNBC Friday.
Microsoft's consolidation decision adds real-world weight to what had been largely market-driven anxiety. The company reported $45.2 billion in capital expenditures and finance leases during its most recent quarter and said spending will accelerate in the second half of its fiscal year — suggesting the cutbacks with individual neoclouds reflect a reallocation of spending rather than a pullback in total AI investment.
CoreWeave and Nebius are both scheduled to report quarterly results next week, and their guidance will offer the next significant data point on how Microsoft's partner reductions are rippling through the neocloud sector.
Marc Sabatini is a staff writer at TechEchelon covering enterprise software, cybersecurity, and the regulatory beats that shape both. He focuses on the deal flow and policy decisions that move markets.
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