AI Industry's Risky Borrowing: Oracle's Financial Troubles Reflect Broader Sector Stress

Oracle Faces Rising Credit Concerns Amid Aggressive AI Investments

Oracle's stock is under increasing scrutiny as Morgan Stanley highlights that the company's credit risk is approaching historic highs, largely due to its substantial investments in artificial intelligence. The cost of insuring Oracle's debt, measured by five-year credit default swaps, reached its highest point in three years this November. Analysts warn that unless Oracle can address investor concerns about its debt-heavy approach, these risks may continue to escalate.

Recently, DA Davidson lowered its price target for Oracle from $300 to $200, pointing to the company's dependence on OpenAI to drive growth in its remaining performance obligations. Over the past week, Oracle's share price has dropped by 9.17%, reflecting growing market apprehension.

Heavy Borrowing Fuels AI Expansion

Oracle has taken on significant debt to support its AI infrastructure ambitions. This year, the company issued $18 billion in investment-grade bonds and is participating in a $38 billion financing project to construct data centers in New Mexico and Texas. According to Morgan Stanley analysts Lindsay Tyler and David Hamburger, Oracle's financial position is under pressure, with free cash flow expected to fall to negative $9.7 billion this fiscal year and potentially worsening to negative $24.3 billion by 2028.

UBS projects that global AI spending will reach $375 billion this year. Oracle's commitment to $500 billion in remaining performance obligations, as part of a broader U.S. AI infrastructure initiative, has drawn attention amid a surge in sector-wide borrowing. Read more on Forbes.

Mixed Analyst Sentiment and Market Performance

Despite these warning signs, some analysts maintain a positive outlook. HSBC has reaffirmed its "Buy" recommendation for Oracle, citing the company's robust RPO backlog and disciplined execution of its AI infrastructure strategy. They also point to Oracle's strategic alliances with major cloud providers like Google, Amazon, and Microsoft as a competitive advantage.

Nevertheless, skepticism persists in the market. Oracle's forward price-to-earnings ratio stands at 29.4, well above the industry average of 22.21, and its PEG ratio of 1.81 indicates that investors are paying a premium for anticipated growth. Over the past month, Oracle's stock has declined by 28.83%, underperforming both the S&P 500 and the Nasdaq.

Industry-Wide Debt Pressures

The surge in debt is not unique to Oracle. Tech giants such as Amazon, Alphabet, and Microsoft have collectively raised $108 billion in debt this year, with Oracle's $18 billion issuance serving as a key indicator of credit stress linked to AI investments. S&P Global Ratings has recently revised its outlook on Oracle to "negative," citing the impact of AI-related capital expenditures on the company's credit profile. Morgan Stanley cautions that without greater transparency regarding its financial strategy, Oracle's credit default swaps could rise to nearly 2% by the end of the year, approaching the 2008 peak of 1.98%.

Looking Ahead: Balancing Growth and Financial Health

As competition in the AI sector intensifies, Oracle's challenge will be to manage its ambitious growth plans while maintaining financial stability. With free cash flow expected to remain negative for the next three years and a $35 billion capital expenditure plan set for 2025, the company's future profitability will depend on its ability to turn AI investments into lasting revenue. For now, investors remain cautious, with recent analyst warnings and downgrades highlighting a critical juncture in Oracle's AI-driven evolution.