Data centre bottlenecks. Valuations at risk.
As we have outlined here on the blog many times over the last year, there just doesn’t seem to be enough money in the hands of potential customers to pay for artificial intelligence (AI) tools that would give hyperscalers a decent return on their intended capital expenditure.
The more they spend, the more revenue and profit they must generate to produce a meaningful return on capital. But the more they invest through capital expenditure, the more competition there’ll be between them (lowering prices for their commoditised products) or the greater the level of overcapacity (also lowering prices).
And when you think about the companies in this race, the capital expenditure (capex) is transforming them from cash-generative, capital-light, high-margin businesses whose services have become verbs into capital-heavy, highly indebted businesses.
And I will reiterate my concern for stock market investors that the rollout of AI is following the exact same script that occurred after the invention of other life-transforming general-purpose technologies such as electricity, the automobile, commercial flight, television, and the internet.
To save you from having to read all of our blog posts over the last year explaining this pattern, here it is:
Invention – excitement – early adoption – lower cost of capital – equity raises and debt issues – scaling – overcapacity – commoditisation – price collapse – creative destruction – distressed asset sales – broad global adoption.
Figure 1. General Purpose Technology (GPT) life cycle
Source: Montgomery Investment Management
Indeed, history is replete with examples of new general-purpose technology (GPT) businesses collapsing before their technology is globally adopted: The inventors first collapse, then are purchased by distressed asset buyers who, because they acquired the assets cheaply, can distribute an affordable version and generate a decent return.
It’s also true that when new general-purpose technologies emerge, investors tend to imagine a neat, smooth path from invention to global adoption. They argue the trend is structural because the technology is inevitable. They’re right, the technology is inevitable – it will change the course of human history – but while the investment theme is structural, the customer for the technology is highly cyclical.
We have long argued the data centre rollout is not structural. The rollout will be met with cycles, including price, business, and economic cycles.
New report: real life evidence of cycles
Sightline Climate is a London-based market intelligence platform founded in 2020 by Kim Zou and Mark Taylor. It provides data, AI-driven insights, and research to help investors, corporates, and governments accelerate the deployment of climate technology solutions.
In a report released this week, entitled, Data Centre outlook: half of 2026 pipeline may not materialize, Olivia Wang revealed speedbumps in the AI data-centre rollout.
The power reality (cyclical not structural)
The narrative surrounding the data centre sector has reached a fever pitch, fueled by the seemingly bottomless appetite for AI training capacity. However, the Q1 2026 Data Centre Outlook from Sightline Climate reveals a significant “reality gap” between announced ambitions and operational reality.
The 2026 pipeline is a mirage. Expect 30–50 per cent delays
The headline figure for 2026 is staggering: at least 16GW of new data centre capacity is slated to come online across roughly 140 projects. However, a closer look at the data suggests a massive bottleneck.
Of the 16GW planned for 2026, only 5GW is currently under construction. In 2025, 26 per cent of expected capacity was delayed, and 10 per cent of projects pushed back their commercial operation dates (CODs) without public notice. Many project announcements remain speculative as landowners attempt to attract blue-chip tenants before securing power or starting construction.
Moreover, due to power constraints, community opposition, and equipment shortages, 30-50 per cent of the 2026 pipeline is expected to be delayed.
Therefore, projections from Data Centre real estate investment trusts (REITs) and AI hyperscalers that rely on “announced” 2026 pipelines may be overly optimistic.
- Hyperscalers rewrite the powering playbook
Perhaps the most significant shift for investors is the realisation that hyperscalers are moving from being “power consumers” to “power developers.”
For example, Google recently acquired Intersect Power’s 10.8GW pipeline of solar, storage, and gas. This signals a shift away from traditional Power Purchase Agreements (PPAs) toward direct asset ownership to accelerate deployment.
Amazon is also becoming a major developer, purchasing 1.2 GW of solar and storage in Oregon from bankrupt developer Pine Gate Renewables.
Meanwhile, Oracle is pursuing the most aggressive grid-independent strategy, with a pipeline dominated by on-site and hybrid capacity, including a 1GW SMR-powered project in Nashville and the Stargate megaprojects.
Conversely, Microsoft is taking a more cautious approach, cancelling leases in 2025 and focusing on smaller centres and restarting large nuclear assets to stay on-grid.
Google and Amazon’s moves to secure power at the portfolio level may provide them with a competitive advantage in a power-constrained market but if the product is commoditised and unprofitable, will it matter?
Regulation – another bottleneck
While NYBYism (Not in My Backyard) will prompt councils, counties, municipalities and shires to block or scale back some data centre developments, other regulators are disrupting AI investor dreams of a smooth 45-degree north-easterly path from invention to global adoption.
Investors should also monitor shifting regulations that could alter project economics.
By way of example, the Federal Energy Regulatory Commission (FERC) is moving toward a final ruling that could assign 100% per cent of grid upgrade costs to data centre developers, significantly raising entry costs for new projects.
In Ireland, a moratorium on grid connections has been lifted, but new data centres are now required to install 100 per cent on-site backup capacity and source 80 per cent of power from new renewables, again changing the economics of supply.
If Ireland’s move serves as a global blueprint for grid operators managing large loads, the costs could make some data centre proposals uneconomic.
The AI infrastructure rollout is migrating from structural dream to cyclical reality. The “low-hanging fruit” of grid-connected data centres is disappearing, replaced by a complex landscape where energy expertise is as valuable as computing power.
While investors might favour hyperscalers and developers with direct ownership of power assets, their new asset-heavy, lower return on equity status may paradoxically make them less attractive.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
