Oracle's AI strategy hinges on high-stakes ratings gamble

Cloud computing giant Oracle Corp is on the brink of a junk-grade credit rating, as investors grow concerned about the company's aggressive, debt-fueled spending to capitalize on the artificial intelligence boom. Unlike many top software firms racing to acquire chips and build computing power, Oracle's limited cash reserves have forced it to rely heavily on borrowing and long-term leases.

The scale of Oracle's spending became apparent in June when its fiscal year-end results revealed negative free cash flows. The company had spent the bulk of its revenue on capital expenditures and committed to roughly $260 billion in data center leases, some of which begin next year. These disclosures have alarmed investors and drawn the attention of ratings agencies.

S&P Global Ratings downgraded Oracle's credit rating to BBB-, one notch above junk status, in July. As of May, Oracle's debt stood at $129.5 billion, approximately 4.3 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). This ratio is considerably higher than peers like Alphabet, Amazon, Microsoft, and Meta Platforms, whose ratios are under 1.

Moody's Ratings, which maintains a negative outlook on Oracle's Baa2 rating (also one notch above junk), noted in February that "none are as leveraged or cash flow negative as Oracle entering into this build phase." Moody's warned that leverage could materially increase in the near term, potentially approaching 5 times EBITDA temporarily. Analysts suggest Oracle will need to issue more debt, cut share buybacks, and raise equity capital to meet its substantial funding needs, despite its constrained ratings.

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While multiple other hyperscaler providers are building out AI infrastructure, none are as leveraged or cash flow negative as Oracle entering into this build phase.