The Heavy Price of Betting Big on AI: Oracle's Debt Surges, Market Value Evaporates by Over $250 Billion in One Month

Oracle is paying the price for its aggressive AI strategy. Oracle has been hit hard during the recent tech stock sell-off, and its strategy of taking on debt to transform into an AI company has unnerved Wall Street, with its stock and bond prices falling much further than its peers. On Thursday (November 13), the Nasdaq Index fell 2.3%, while Oracle dropped 4.2% that day, becoming one of the worst-affected stocks in the latest wave of tech sell-offs. In the past month, Oracle’s share price has plummeted nearly 30%, almost double the decline of Meta, the second-worst-performing hyperscale cloud provider. This drop has wiped out more than $250 billion in market value gains Oracle had enjoyed since it announced its partnership with OpenAI last September. At the same time, Oracle’s bond price index has fallen about 6% since mid-September, a notably weaker performance than all major peers. Analysts point out that investors’ worries about Oracle center on its aggressive capital expenditures, which have caused its debt to surge. The company’s long-term debt has soared from $75 billion a year ago to around $96 billion, and Morgan Stanley predicts this figure could skyrocket to about $290 billion by 2028. Oracle’s “all-in” AI strategy stands out, especially as the market is increasingly cautious about tech giants’ massive capital spending. Analysts warn the company is heavily reliant on a few AI startup clients, especially OpenAI, creating significant credit risk. Oracle’s Aggressive Bet on AI Oracle’s approach to the AI race is extremely aggressive. The company says its agreement with OpenAI will bring in $300 billion in revenue between 2027 and 2032. According to S&P Visible Alpha’s projections, its infrastructure business revenue is expected to grow over tenfold by 2029. But this transformation marks a fundamental shift in Oracle’s business model. Alex Haissl from Rothschild & Co Redburn noted: “This is totally different from the cloud service model favored by investors. The deals look great from a revenue perspective, but they are extremely capital-intensive and create almost no value.” Oracle entered cloud computing much later than its competitors, and its strategy is increasingly focused on making an all-out bet on AI, relying heavily on OpenAI’s success. The market is worried about huge capital spending by a few large tech companies, fearing that if loss-making AI startups like OpenAI and Anthropic don’t deliver on their promises, these investments could backfire. A short seller who has tracked Oracle shares for a long time commented: “(Oracle founder) Ellison’s current spending is completely out of the ordinary. The market clearly isn’t interested anymore in companies endlessly burning cash on AI.” Debt Surge: Financial Structure Flashes Red Alert Oracle is rapidly expanding its capacity through aggressive debt financing. According to Bloomberg data, the company’s long-term debt has grown from $75 billion a year ago to about $96 billion. Morgan Stanley forecasts this number will soar to about $290 billion by 2028. Last September, Oracle issued $18 billion in bonds and is now negotiating $38 billion in debt financing with several US banks. Its financial structure is the weakest among the five hyperscale cloud providers. According to JPMorgan data, Oracle is the only company with negative free cash flow, and its debt-to-equity ratio has surged to 500%, far above Amazon’s 50% and Microsoft’s 30%. While all five companies’ cash asset ratios have dropped significantly amid this spending spree, Oracle’s is by far the lowest. Ratings Agencies Sound Frequent Warnings Meanwhile, Oracle’s aggressive expansion strategy has begun to trigger warnings from credit rating agencies. JPMorgan analysts point out, “Oracle’s ambitious AI build-out conflicts with the limitations of its investment-grade balance sheet.” According to a Wallstreetcn article, Barclays analysts downgraded Oracle’s bond rating from market neutral to underweight this week, warning that its massive AI infrastructure expenditure has surpassed its free cash flow. Credit rating agency Moody’s notes the company faces major risks from reliance on just a few AI firms. S&P Global warns that by 2028, one-third of Oracle’s revenue will be tied to a single customer, referring to its dependence on OpenAI. “This is a major liability and credit risk for Oracle. Its biggest and most critical customer is a venture capital-backed startup,” said S&P Global Director Andrew Chang. Analysts also note that Oracle’s data center lease terms are much longer than the contract terms for selling computational power to OpenAI. The company has signed at least five long-term lease agreements for US data centers ultimately intended for OpenAI, forming $100 billion in off-balance-sheet lease commitments. These projects are at various stages of construction, with some not breaking ground until next year. Risk Warning and Disclaimer The market involves risks, and investment must be approached cautiously. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any views, opinions, or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk.