Oracle credit risk hits record as AI spending binge strains balance sheet

Oracle Corp.'s credit risk hit a record Friday, with CDS spreads climbing to 198.23 basis points, as the company's massive AI infrastructure spending binge strains its balance sheet and pushes free cash flow deep into negative territory.

"Oracle's rapidly expanding AI infrastructure business is increasing its overall credit risk, reflecting our more cautious view of the AI infrastructure industry, including rising capital expenditure requirements, an uncertain path to profitability, rapidly evolving industry and competitive landscape, and high customer concentration," S&P Global Ratings said in a statement explaining its downgrade of Oracle to BBB-, one notch above junk.

The company burned through more than $20 billion in free cash flow over the past four quarters, with S&P estimating the deficit could widen to $42 billion in the current fiscal year. Oracle's capital expenditure reached $55.7 billion on a trailing basis, and management expects roughly $70 billion more in fiscal 2027. The company plans to raise about $40 billion through debt and equity this year, including a previously announced $20 billion at-the-market stock sale.

The deterioration matters beyond Oracle. The company holds about $117 billion in bonds in the Bloomberg US Investment Grade Corporate Bond Index, making it the largest non-financial issuer. A further downgrade to junk would force many institutional investors with investment-grade mandates to sell, potentially repricing risk across the entire $1.17 trillion index.

The OpenAI Concentration Problem

Roughly half of Oracle's $638 billion in remaining performance obligations — a measure of contracted future revenue — is tied to a single customer: OpenAI, according to S&P estimates. That concentration amplifies the risk of Oracle's timing mismatch: the company must spend billions on data centers upfront while recognizing revenue from those contracts over years. "It doesn't affect revenue today, so it's going to be hard for them to cash flow their way out of this," Andrew Wells, chief investment officer at SanJac Alpha, said.

Oracle's 10-year bonds now yield about 6.4 percent, a meaningful premium to the 5.7 percent average for BBB-rated debt and closer to the 6.7 percent yield of BB-rated credits. The company sold $25 billion of investment-grade bonds in February and has been exploring novel ways to reduce cash burn, including asking some customers to pre-pay for costly computing components that go into data centers.

Hyperscaler Divergence

Oracle's predicament stands in sharp contrast to other AI hyperscalers. Alphabet Inc. posted free cash flow of about $73 billion last year, and Meta Platforms Inc. generates more than enough cash to fund its AI investments. That gives them "greater financial flexibility to outspend Oracle and weather industry downturns," according to S&P. Microsoft Corp. and Amazon.com Inc. also maintain strong cash generation relative to their AI spending plans.

The divergence raises a fundamental question for investors: can Oracle's AI infrastructure bet generate returns before its credit standing deteriorates further? The company's cloud infrastructure revenue grew 93 percent in the June quarter, and cloud now represents 52 percent of total revenue. Management has reaffirmed a $90 billion revenue target for fiscal 2027 with non-GAAP EPS of $8.05.

Oracle shares fell more than 4 percent to $126.91 on Friday, hitting a 52-week low of $125.93. The stock has lost 63 percent from its September record high of $345.72 and is down 35 percent year to date, underperforming the S&P 500 by more than 45 percentage points. The stock trades at 16 times forward earnings, a discount to its five-year average of 22 times.

The company has vowed to maintain its investment-grade status. "Oracle remains strongly committed to maintaining an investment-grade credit rating as our top capital allocation priority," a spokesperson said. But with capex expected to rise through at least fiscal 2029, according to CreditSights, the path back to financial stability depends on whether the $638 billion backlog converts into cash before the credit markets lose patience.

This article is for informational purposes only and does not constitute investment advice.