Oracle's $300 Billion AI Gamble Triggers Wall Street Alarm as Debt Concerns Mount

Oracle hit hard in Wall Street's tech sell-off over its huge AI bet

Oracle has been hit harder than Big Tech rivals in the recent sell-off of tech stocks and bonds, as its vast borrowing to fund a pivot to artificial intelligence unnerved Wall Street. The US software group founded by Larry Ellison has made a dramatic entrance to the AI race, committing to spend hundreds of billions of dollars in the next few years on chips and data centers -- largely as part of deals to supply computing capacity to OpenAI, the maker of ChatGPT. The speed and scale of its moves have unsettled some investors at a time when markets are keenly focused on the spending of so-called hyperscalers -- big tech companies building vast data centers. Oracle shares are down 25 percent in the past month, nearly twice the fall of the next worst-performing hyperscaler, Meta. The slide has reversed more than $250 billion of gains in its market value when the Texas-based group disclosed its deals with OpenAI in September. A Financial Times index tracking the price of Oracle's debt has fallen about 6 percent since mid-September, significantly worse than any of its major peers. Oracle has prompted particular concern because the group shifted from business software to cloud computing later than its rivals. Its strategy has become more focused on an all-out bet on AI, pinned largely to the success of OpenAI. "This is a completely different business model to what investors prize in cloud services," said Alex Haissl at Rothschild & Co Redburn. "The deals look fantastic when you look at the revenue figures, but they are very capital-intensive so create very little value." Investors are concerned about lofty valuations and huge capital expenditure by a few large tech groups that could backfire if a handful of lossmaking AI start-ups such as OpenAI and Anthropic fail to deliver on their promises for the technology. Oracle shares fell 4.2 percent on Thursday as the NASDAQ tumbled 2.3 percent -- the latest in a series of sell-offs led by tech stocks. The stock recovered some of those losses on Friday. Oracle has said its deals with OpenAI would generate $300 billion of revenue between 2027 and 2032. Its executives say the rewards will justify the risks due to intense and accelerating AI demand, which far exceeds existing supplies of computing power. Its shares are still up 30 percent this year. Oracle's infrastructure business is forecast to increase revenues by more than 10 times by 2029, according to estimates compiled by S&P Visible Alpha. And the bulk of Wall Street analysts are bullish on its stock. But Oracle has been aggressive in tapping debt markets to rapidly build its capacity. The group has about $96 billion of long-term debt, up from $75 billion a year ago, according to Bloomberg data. Morgan Stanley forecasts this will soar to about $290 billion by 2028. Oracle sold $18 billion of bonds in September and is in talks to raise $38 billion in debt financing through a number of US banks. Ellison "is now way off the reservation in terms of how he's spending," said a short seller who has long tracked Oracle's stock but does not have an active bet against it. "The market is clearly saying it is no longer interested in companies burning endless cash on AI." Barclays analysts this week downgraded their rating of Oracle's debt from market neutral to underweight, warning that its large expenses on AI infrastructure had outpaced its free cash flow. Credit rating agency Moody's has also flagged up significant risks due to Oracle relying on a small number of AI companies. S&P Global warned that a third of Oracle's revenues will be tied to a single customer by 2028, referring to its reliance on OpenAI. "That is a huge liability and credit risk for Oracle. Your main customer, biggest customer by far, is a venture capital-funded start-up," said Andrew Chang, a director at S&P Global. OpenAI faces questions about how it plans to meet its commitments to spend $1.4 trillion on AI infrastructure over the next eight years. It has struck deals with several Big Tech groups, including Oracle's rivals. Of the five hyperscalers -- which include Amazon, Google, Microsoft, and Meta -- Oracle is the only one with negative free cash flow. Its debt-to-equity ratio has surged to 500 percent, far higher than Amazon's 50 percent and Microsoft's 30 percent, according to JPMorgan. While all five companies have seen their cash-to-assets ratios decline significantly in recent years amid a boom in spending, Oracle's is by far the lowest, JPMorgan found. JPMorgan analysts noted a "tension between [Oracle's] aggressive AI build-out ambitions and the limits of its investment-grade balance sheet." Analysts have also noted that Oracle's data center leases are for much longer than its contracts to sell capacity to OpenAI. Oracle has signed at least five long-term lease agreements for US data centers that will ultimately be used by OpenAI, resulting in $100 billion of off-balance-sheet lease commitments. The sites are at varying levels of construction, with some not expected to break ground until next year. Safra Catz, Oracle's sole chief executive from 2019 until she stepped down in September, resisted expanding its cloud business because of the vast expenses required. She was replaced by co-CEOs Clay Magouyrk and Mike Sicilia as part of the pivot by Oracle to a new era focused on AI. Catz, who is now executive vice-chair of Oracle's board, has exercised stock options and sold $2.5 billion of its shares this year, according to US regulatory filings. She had announced plans to exercise her stock options at the end of 2024.

Oracle's astonishing $300bn OpenAI deal is now valued at minus $74bn

It's too soon to be talking about the Curse of OpenAI, but we're going to anyway. Since September 10, when Oracle announced a $300bn deal with the chatbot maker, its stock has shed $374bn in market value: OK, yes, market caps don't work like that and the post headline is clickbait. But equivalents to Oracle shares are little changed over the same period (Nasdaq Composite, Microsoft, Dow Jones US Software Index), so neither is it entirely wrong. Oracle's "astonishing quarter" really has cost it as much as one Dell, or two eBays. Investor unease stems from Big Red betting a debt-financed data farm on OpenAI, as MainFT reported last week. We've nothing much to add to that report other than the below charts showing how much Oracle has, in effect, become OpenAI's US public market proxy: The theory goes that OpenAI is in a rush to discover AGI, and Oracle is uniquely able to scale the compute capacity it needs. Oracle promises the lowest upfront costs and fastest path to income generation among the hyperscalers because it's a data centre tenant rather than the landlord. Alternatively, Oracle doesn't have as much operating profit to burn as its competitors, so is throwing everything it can at supporting its one big customer in exchange for an IOU: At an analyst day last month in Las Vegas, Oracle said it was aiming for cloud computing revenue of $166bn by 2030: To get there, Oracle's capex budget for the current financial year ending May is $35bn. The consensus has annual capex levelling out at around $80bn a year in 2029, after which revenues continue to ramp: And from 2027, the majority of revenue would be coming from OpenAI: But Oracle's net debt is already at 2.5 times ebitda, having more than doubled since 2021, and it's expected to nearly double again by 2030. Cash flow is forecast to remain negative for five straight years: So while the OpenAI agreement has been more than written off the equity, the risk of unfunded expansion remains and the cost of hedging Oracle debt is at a three-year high. We need to add the usual warnings: Credit-default-swap liquidity isn't great; the increased demand for Oracle CDS comes after $18bn of bond sales in September; a CDS premium in the low 100 basis points isn't that exciting; and some firms taking the other side of the trade are no mugs. Still, pointy. Beyond the charts, a broader question relates to whether an OpenAI deal is still worth announcing. A few months ago, any kind of agreement with OpenAI could make a share price go up. OpenAI did very nicely out of its power to reflect glory, most notably in October when it took AMD warrants as part of a chip deal that bumped share price by 24 per cent. But Oracle is not the only laggard. Broadcom and Amazon are both down following OpenAI deal news, while Nvidia's barely changed since its investment agreement in September. Without a share price lift, what's the point? A combined trillion dollars of AI capex might look like commitment, but investment fashions are fickle.

Oracle's AI Strategy Shake-Up Sparks Market Jitters As Shares Plunge 25% - Oracle (NYSE:ORCL)

Oracle Corporation (NYSE:ORCL) has seen a significant market reaction following its bold shift towards artificial intelligence (AI), resulting in a 25% drop in shares over the past month. What Happened: Oracle's ambitious entry into the AI sector, fueled by substantial borrowing, has caused unease on Wall Street. The tech behemoth has pledged to invest hundreds of billions in the next few years on chips and data centers, primarily to bolster computing capacity for OpenAI, the creator of ChatGPT. As reported by the Financial Times, the magnitude and speed of Oracle's strategic shift have caused investors to question, especially at a time when the spending patterns of large tech firms building massive data centers, or hyperscalers, are under scrutiny. Oracle's shares have taken a 25% hit in the past month, almost twice the decline of the next worst-performing hyperscaler, Meta. This downturn has erased over $250bn in market value gains that Oracle had accumulated after announcing its OpenAI deals in September. Also Read: Top Analyst Says Oracle's 'Irresponsible' AI Bet Differs From 'Healthy' Microsoft And Google Demand Oracle's delayed switch from software to cloud computing, coupled with its hefty wager on AI, has raised particular alarm. Why It Matters: Despite the market's response, Oracle remains confident that the potential benefits will outweigh the risks, pointing to the rapidly increasing demand for AI, which far exceeds the current supply of computing power. Oracle's bold move into AI represents a significant shift in strategy, and the market's reaction underscores the risks associated with such a pivot. However, with the growing demand for AI and the potential rewards on offer, Oracle's gamble could yet pay off. Read Next Oracle Stock Soars Despite Missing Q1 Estimates: Here's Why ORCLOracle Corp$223.620.35%OverviewMarket News and Data brought to you by Benzinga APIs

The most important chart in AI today? Oracle's default swaps blow out By Investing.com

Investing.com -- Shares in Oracle Corporation (NYSE:ORCL) are down as much as 37% from the record high set in September as investors turned wary of its debt-financed jump into artificial-intelligence infrastructure, with bond and credit-default‐swap (CDS) markets flashing caution. In layman's terms, a CDS is insurance against a company going bust. When the price of that insurance jumps, investors are getting nervous. Get premium news and insight, AI stock picks, and deep research tools by upgrading to InvestingPro - get 55% off today Investors dumped Oracle bonds after a report that the company plans to add about $38 billion in debt to fund its cloud and AI build-out. The move drove weaker bond prices and higher yields, with market participants pointing to stress in a previously stable investment-grade issuer. Oracle 5-year CDS (Source: Bloomberg) Traders have accelerated hedging via 5-year CDS contracts, signalling mounting concerns about credit risk in the AI arms race. Market players say the underlying catalyst is the scale and speed of AI infrastructure investment across the tech sector. Wall Street analysts fear that borrowing to fuel the build-out may strain cash flows, delay returns and heighten credit risk even for large-cap names. A recent fund-manager survey found that over half of respondents view AI spending as the top market risk. However, not everyone is very concerned. "Oracle is structuring AI compute contracts as non-cancelable, non-modifiable, take-or-pay contracts ensuring stable cash flows and cost visibility," BofA research analyst Brad Sills wrote in a client note last month. For Oracle, the shift is material. The company has for decades drawn strength from its enterprise-software and database franchises. Now it is pivoting heavily into data-centres and cloud infrastructure tailored for AI workloads, financed with freshly issued debt. "Oracle's entry into AI compute marks its transition into a fourth hyperscaler, as accelerated capex and GPU density bring the company's footprint inline with hyperscaler peers," Sills said. The total addressable market (TAM) for AI infrastructure is estimated by IDC at $200 billion in annual spend by 2028; a 42% 5yr CAGR. While the mounting borrowings prompted some bond buyers and lenders to tighten terms or demand higher compensation, equity investors are taking notice. Rising credit spreads and bond yields have weighed on sentiment, adding to concerns about execution risks and the timing of returns from AI investments. Some market‐watchers now treat Oracle's credit-market performance as a proxy for the broader AI-infrastructure boom's financial health. While Oracle remains investment grade and its default risk remains low in absolute terms, the warning lights flashing in both its debt and derivatives markets are rare for a company of its size and standing.