• 2 min read
Oracle Falls to BBB- as AI Buildout Drains Cash
S&P cut Oracle to BBB-, one step above junk, as its $250 billion AI data-center push drives deep negative free cash flow.
Image: TNW
Oracle is now just one notch above junk status after S&P cut the company to BBB- on July 9, underscoring how aggressively its AI infrastructure push is straining the balance sheet.
The ratings downgrade comes as Oracle pours money into a $250 billion data-center expansion plan that is consuming cash faster than new revenue can replace it. In the fiscal year ended May 31, Oracle’s free cash flow turned sharply negative, with the company burning through nearly $24 billion after capital expenditure. S&P estimates that shortfall could widen to $42 billion as the buildout continues.
The bond market is already pricing in more risk. Oracle, with $117 billion in outstanding debt, is now the second-largest non-financial debt issuer in the Bloomberg US Corporate Bond Index after Amazon. Its shares fell nearly 6% on Thursday, while its 10-year bonds yielded roughly 6.5% — well above the BBB index average and closer to BB, the tier associated with junk debt, according to Bloomberg.
“The gap reflects investors demanding a premium for the uncertainty around whether AI revenue will justify the debt.”
The risk is also highly concentrated. S&P estimates that roughly half of Oracle’s $638 billion in remaining performance obligations — its measure of contracted future revenue — is tied to OpenAI. Moody’s has also assigned Oracle a negative outlook, suggesting a second major ratings agency sees meaningful risk in the company’s current trajectory.
Oracle spent more than $55 billion on data centers in its last fiscal year and expects to raise another $40 billion through debt and equity this year, including $20 billion in stock sales at market prices. To ease the financing burden, the company has asked customers to prepay for computing components; it says prepaid and customer-supplied hardware for large AI contracts now totals $75 billion.
Recommended reading
Founders Fund adds ex-OpenAI exec Ryan Beiermeister
Oracle is far from alone in borrowing heavily for AI infrastructure. According to Bloomberg, hyperscalers plan to spend as much as $725 billion on AI this year, and Big Tech’s combined AI debt has reached $350 billion. The difference is that Oracle lacks the same cushion as its biggest rivals: Google generated about $73 billion in free cash flow last year, while Oracle’s cash generation has been overwhelmed by capital spending.
The central question now is whether Oracle’s cloud revenue — up 93% last quarter — can scale quickly enough to justify one of the most leveraged balance sheets in tech becoming even more leveraged.
Enterprise Editor
Marcus follows the money. He covers enterprise software, cloud architecture, and the tectonic shifts in Big Tech strategy. He translates dense earnings calls and complex M&A activity into actionable insights about where the industry is actually heading. If a tech giant makes a silent pivot, Marcus is usually the first to notice.
via TNW
