Did the AI bubble really just pop before our eyes?

Microsoft is taking a step back from its big AI data center buildout, abandoning new datacenter projects in the US and Europe that would have utilized about 2 gigawatts of electricity, TD Cowen analysts wrote in a note today.

It wasn’t just the news that startled investors, but the reasoning. “We continue to believe the lease cancellations and deferrals of capacity points to data center oversupply relative to its current demand forecast,” the TD Cowen analysts wrote—indicating that maybe big tech doesn’t really need hundreds of billions worth of data centers after all.

Back in February, TD Cowen pointed out that Microsoft had abandoned a few data center leases in the US as the big tech giant reworked its relationship with AI startup OpenAI. Bloomberg reported today that Microsoft still plans to invest $80 billion in AI hardware this year.

Any stocks involved in the AI trade plummeted on the news. Companies tied to the data center industry took a particular beating: Vertiv Holdings sank 10.79%, Broadcom dropped 4.78%, Super Micro Computer fell 8.86%, and Arista Networks declined 6.07%.

Magnificent spending

Investors have been increasingly scrutinizing big tech’s spending on AI infrastructure like servers and data centers, demanding some solid returns for these major investments—especially after Chinese startup DeepSeek proved that its AI model measured up to ChatGPT with only a tiny fraction of its price tag.

Earlier this week, Alibaba Chairman Joe Tsai called out US big tech for creating an AI bubble, saying that “People are investing ahead of the demand we’re seeing today.”

And today’s news seemed to confirm investors’ worst fears: All that spending might be superfluous.

Microsoft isn’t the only company that has raised investors’ eyebrows with its plans to spend big. Meta Platforms has committed to spending $65 billion on AI hardware this year, while Alphabet projects it will spend $75 billion. Both companies have already swooped in to take over some of Microsoft’s abandoned leases, TD Cowen said.

Seems like big tech names still see big demand, even if investors are getting nervous.—LB

🟢 What’s up

• That cost a lot more than a dollar: Dollar Tree rose 3.08% after announcing it will sell Family Dollar, which it purchased for $8.5 billion in 2019, for just $1 billion.
• Playtika soared 20.45% thanks to an upgrade from Bank of America analysts, who think the mobile gaming company’s profitability is impressive.
• Paychex popped 4.20% after meeting analyst expectations for revenue last quarter and beating profit forecasts.
• A day after dumping its UniFirst acquisition, uniform maker Cintas rose 5.82% thanks to strong earnings.
• Perimeter Solutions climbed 9.99% after the fire retardant manufacturer caught an upgrade from UBS analysts, who cited rising rates of wildfires as an opportunity for profit growth.

What’s down

• Nvidia shed 5.74% on reports that Chinese regulators are encouraging tech companies that use chips adhering to strict environmental guidelines.
• Nvidia’s selloff dragged fellow Mag 7 stocks down with it: Tesla lost 5.58%, Amazon fell 2.23%, Alphabet shed 3.27%, and Meta Platforms sank 2.45%.
• Momentum stocks also tumbled as the S&P 500's three-day winning streak came to an end. Robinhood Markets dipped 7.10%, Palantir shed 4.37%, and Hims & Hers Health lost 9.94%.
• Auto stocks sank ahead of President Trump's surprise tariff announcement. GM fell 3.12%, and Stellantis dove 3.55%.

There’s a new bear on Wall Street, and his name is Venu Krishna. The Barclays strategist just lowered his 2025 S&P 500 price target from 6,600 to 5,900, implying that the index will remain basically flat from where it stood on the first trading day of the year (5,868).

The reason Krisha’s got the lowest price target on Wall Street is well-known by now: tariffs.

“Our base case assumes that earnings take a hit as tariffs (higher China tariffs stick but do not escalate, reciprocal tariffs amount to 5% on the rest of the world) contribute to material slowing in U.S. activity that nonetheless stops short of outright recession, allowing valuations to gradually recover,” Krishna wrote.

Barclays gives the above situation a 60% likelihood, while it thinks there’s a 15% likelihood of tariffs pushing the US economy into a contraction and pulling the S&P 500 all the way down to 4,400.

We give today’s announcement a 100% likelihood to worry investors everywhere.

GameStop has gone through more phases over the last few years than your angsty teenage brother. The company has transformed from brick and mortar video game store, to booming meme stock legend, to struggling ex-meme stock, to…a bitcoin play?

It’s true: GameStop announced late yesterday that its board approved “the addition of Bitcoin as a treasury reserve asset, whereby a portion of our cash or future debt and equity issuances may be invested in Bitcoin.”

The news wasn’t a huge shock to the meme stock’s investors, who suspected the company would make a crypto pivot after CEO Ryan Cohen posted a pic with MicroStrategy’s Michael Saylor in February.

It turns out that betting on bitcoin reminded GameStop shareholders of the company’s 2021 glory days. Shares soared 11.65% today.

GameStop buying bitcoin

However, the bitcoin excitement is the bandaid covering the fact that GameStop’s original business model—selling video games—is floundering.

The company announced yesterday that it plans to close even more of its stores, after sunsetting about a quarter of them over the past year. It also reported net sales of $1.28 billion in Q4, down 28% from a year earlier and below expectations of $1.48 billion.

The one bright spot in GameStop’s earnings was its humongous pile of money. The company has about $4.8 billion in cash, an impressive increase from the $922 million it had this time last year. A good chunk of that hoard will likely go toward buying bitcoin.

While pulling a page out of MicroStrategy’s playbook and essentially becoming a bitcoin investment was well received by investors today, there’s an obvious pitfall to this strategy: It’s basically another version of a meme stock gamble.

With a weakening business, a lack of solid fundamentals, and a history of volatile trading, tying itself to another highly risky asset doesn’t exactly equate to great long-term, steady investment returns for GameStop shareholders.

Another obvious flaw in the plan: Why would retail investors buy GameStop as a bitcoin play, when they could just buy actual bitcoin or a spot bitcoin ETF?

The big picture: The median price target on GameStop is $11.50, about 60% lower than where it's trading today. Across all the analysts covering GameStop, the consensus rating is “sell” according to the Wall Street Journal.—LB

• The average annual bonus on Wall Street rose to $244,700 last year, while the entire bonus pool hit a record $47.5 billion.
• People are becoming influencers on LinkedIn, which is…so cool?
• Activist investors are really active lately: Elliott sued Phillips 66, Engine Capital put two friendly faces on Lyft’s board, Starboard nominated three new members of Autodesk’s board, and Keith Meister will join Illumina’s board.
• Crypto scammers beware: A group of researchers have built a tool to track the evil-doers behind rug pulls. Turns out there’s only 438 of them, but they’ve made about $3.2 trillion
• Johnson & Johnson revealed impressive results for its new lung cancer treatment, but the battle against AstraZeneca to own this space is heating up.
• Here are the best investments to own during a recession. Healthcare and consumer staples stocks are no-brainers, but who knew growth stocks held up so well?

It’s been a relatively quiet week of economic data so far, but the heat turns up a notch tomorrow. We’ve got the usual weekly initial jobless claims report, which has taken on new importance lately as a barometer of the labor market. We’ll also get a final revision of Q4 US GDP, and the advance goods trade balance, both of which should reveal some of the initial impact of the president’s tariff policies on the economy and global trade.

As for earnings, the only highlight is a company that makes some of the comfiest sweatpants on the block.

After the close

• Lululemon Athletica may be about looking good, but shares have had an ugly year, and worries are rising that retailers like this will be the hardest hit by any sort of consumer spending slowdown. The company has prioritized its men’s fashion segment but only has lukewarm results to show for it, while competition is encroaching into the athleisure market from all sides. The one bright spot is the company’s recent international expansion, but that’s a slow and steady business, and the stock needs an injection of confidence right this minute. Consensus: $5.65 EPS, $3.52 billion in revenue.

We’re down to the final four stocks in our Market Madness bracket, and what a showdown it is.

The winner of the S&P 500 region is an old fan favorite: Nvidia. The AI king kept its crown, dunking on upstart Palantir 55% to 45%. But it faces a tough test in the Final Four from a familiar face: Dow regional champ and fellow Mag 7 stock Amazon, which crushed Goldman Sachs 73% to 27%.

The matchup sheds a spotlight on a pivotal question that plenty of investors are asking these days: How all-in on the AI trade should you be? If you’re a true believer, Nvidia is the clear choice. It remains the leader of the AI industry, and a new chipset built to meet rising demand provides the company with a clear path to higher profitability…If big tech companies don’t cut back on their AI spending the way some are worried they might. If capex cuts do come, a more diversified business like Amazon’s (e-commerce, cloud services, and AI) is more likely to weather the storm.

Meanwhile, in an upset for the ages Broadcom took down MicroStrategy to win the Nasdaq 100 region, 62% to 38%. It will go toe to toe with fintech hot shot Sezzle, which dethroned last year’s champion GeneDX 53% to 47% in the Russell 2000 region.

Sezzle fans have to be bullish on all the potential in the fintech space at the moment. Just look at Klarna’s upcoming IPO and it’s clear that the Buy Now, Pay Later trend has plenty of momentum. But that highlights an issue for Sezzle: rising competition. BNPL is hot enough that everyone wants in on the action, and Sezzle needs to find a way to stay a step ahead of its rivals—as well as a macroeconomic slowdown, which could cut consumer spending.

Broadcom has some issues of its own. There’s a reason the stock’s down 20% in 2025: Broadcom’s competition is none other than Nvidia, and as the two spend enormous amounts of money to develop the strongest AI XPUs on the market, Nvidia has the edge. But shareholders love Broadcom’s subscription revenue from its VMware integration, its solid dividend yield, and the fact that the AI semiconductor market may have just enough room for Broadcom to coexist with the AI king.

Anyway, it’s on to the Final Four! Take a look at the matchups here, cast your vote for the company you’d rather invest in this year, and we’ll see you at the Alamodome (or, you know, in tomorrow’s newsletter).—MR