Microsoft declines to expand its Texas data center deal with Nscale as neocloud funding worries grow

Microsoft will not expand its Texas data center deal with the UK’s Nscale, according to a source familiar with the matter¹. Microsoft rejected an option to double the size of its Texas data centre lease with the neocloud company⁴, a multibillion-dollar AI deal^2,3.

The companies struck a deal last year for Nscale to deploy around 200,000 Nvidia chips¹. The decision follows Microsoft’s pullback from a deal for Nscale’s UK data center⁵. Nscale, which is backed by Nvidia, filed for an IPO in September⁵.

The rejected option would have doubled the Texas lease⁴, and the deal Microsoft turned down was described as worth multiple billions of dollars^2,3. Microsoft has not expanded the existing Texas arrangement, the source said¹.

Why it matters to investors

The decision lands as investors grow wary of the debt-laden construction of AI infrastructure, particularly at so-called neoclouds such as CoreWeave and Nebius². In recent weeks the debt-heavy model of neocloud firms has come under scrutiny⁵.

The pressure is visible in the market. Shares of Nvidia-backed neoclouds CoreWeave, Nebius and Iren fell at least 30% in October as tightening credit markets raised concerns about an AI financing gap⁶.

Politics has added to the strain. CoreWeave bonds fell to new lows after the Texas governor election, in which Democrat Gina Hinojosa, who has called for an immediate data center moratorium, ousted Gov. Greg Abbott⁷. CoreWeave stock fell 7.2%⁷.

Texas is where Microsoft’s expansion option sat^1,4. The decision comes as Nscale prepares for a stock market listing⁵.

What to watch

Investors will look for signs of whether other large customers follow Microsoft in trimming neocloud commitments, given the wariness over debt-funded AI buildouts^2,6.

Nscale’s IPO filing from September⁵ puts its contract book in focus. The scale of the existing deal, around 200,000 Nvidia chips¹, means the remaining Microsoft relationship carries weight for the company.

The Texas political picture is also in play. A governor who has called for a data center moratorium⁷ could change the economics of projects in the state, where the expansion option was declined⁴.

The October decline of at least 30% in shares of CoreWeave, Nebius and Iren⁶ shows how quickly sentiment toward the sector has moved, and how sensitive these companies are to the decisions of their largest customers^2,5.