Borrowing to the Brink: How Oracle’s AI Expansion Put Its Credit Rating on Life Support

Oracle Corp. (NYSE: ORCL ) stock fell more than 3% in Thursday’s premarket session as investors reassessed the software giant’s aggressive AI spending strategy amid a mixed broader market.

Nasdaq futures slipped 0.4%, while S&P 500 futures edged up 0.2%.

The decline comes as Oracle faces mounting scrutiny from investors and credit analysts over the financial risks tied to its rapid AI infrastructure expansion.

Read Also: The Cost of the AI Race: Is Oracle Investing Its Way to Junk Status? Debt-Funded AI Expansion Draws Scrutiny Oracle has accelerated spending on AI data centers to expand its cloud business, but limited cash reserves have forced the company to rely heavily on debt financing and long-term lease commitments.

In July, S&P Global Ratings downgraded Oracle’s credit rating to BBB-, just one notch above speculative grade.

Moody’s Ratings said other hyperscale cloud providers are also investing aggressively in AI infrastructure, but none are doing so with leverage and cash flow metrics as stretched as Oracle’s.

The agency also warned that Oracle’s leverage could temporarily approach five times EBITDA.

Analysts Warn Of Additional Downgrade Risk Credit analysts say Oracle’s balance sheet could face additional pressure if leverage remains elevated.

S&P analyst Andrew Chang told Reuters another downgrade is possible if leverage stays above 4.5 times.

Fitch Ratings has similarly warned that sustained leverage above its thresholds could result in negative ratings action.

Morgan Stanley credit analyst Lindsay Tyler said on a podcast that Oracle could end the year with two low-BBB credit ratings, increasing concerns over potential “fallen angel” status, although she views a move to high-yield debt as a medium-term risk rather than an immediate threat.

Meanwhile, Rothschild & Co Redburn analyst Alex Haissl, who rates Oracle Sell, told Reuters the market continues to assume the company’s new data centers will be completed on schedule and generate the expected revenue and profits.

He said he remains more cautious about the economics underpinning Oracle’s cloud expansion.

AI Growth Story Faces Balance-Sheet Test Oracle has pointed to its $638 billion in remaining performance obligations as evidence that demand for its AI infrastructure investments remains strong.

However, investors continue to monitor customer concentration, long-term lease obligations and the mismatch between 15- to 19-year data center leases and shorter-duration customer contracts.

Chang described that timing mismatch as a key credit risk.

North Carolina State Treasurer Brad Briner told Reuters that Oracle Chairman Larry Ellison has successfully made transformational bets before.

However, Briner said such strategies raise greater concerns for bondholders because they shoulder more of the downside while receiving far less of the upside.

Neuberger Berman senior portfolio manager David Brown said Oracle has the most stretched balance sheet among its peers but expects management to preserve the company’s investment-grade credit rating by managing its liabilities carefully.

Earnings And Analyst Outlook Oracle is expected to report quarterly results on Sept.

8.

Analysts expect earnings of $1.67 per share, up from $1.47 a year earlier, on revenue of $19.12 billion, compared with $14.93 billion last year.

The stock carries a consensus Buy rating with an average analyst price forecast of $260.04.

Recent analyst actions include: CLSA initiated coverage with a Hold rating and a $145 price forecast on July 20.

Bernstein maintained an Outperform rating and raised its price forecast to $325 on June 11.

RBC Capital maintained a Sector Perform rating with a $190 price forecast on June 11.

ETF Exposure Oracle is a major holding in several technology-focused exchange-traded funds, including the iShares Expanded Tech-Software Sector ETF (BATS: IGV ), where it accounts for 5.87% of assets; the First Trust NASDAQ Technology Dividend Index Fund (NASDAQ: TDIV ), with a 5.21% weighting; and the Pacer Data and Digital Revolution ETF (NYSE: TRFK ), where it represents 7.57% of the portfolio.

Because of those sizable weightings, significant inflows or outflows in these ETFs can affect demand for Oracle shares.

Price Action ORCL Stock Price Activity: Oracle shares were trading lower by 3.10% at $139.90 during premarket trading on Thursday, according to Pro data.

Photo via Shutterstock Read Also: Oracle Faces Pressure: Data Center Costs and OpenAI Exposure Weigh on Stock