Oracle's stock has taken a hit as AI spending concerns resurface

By Christine Ji

A lack of clarity around Oracle's future AI spending plans is keeping investors on the sidelines, one analyst believes

Oracle's five-year credit-default-swap spread reached 219 basis points in late July, its highest level in at least six years.

Oracle's share price is under pressure once more as artificial-intelligence spending concerns retake the spotlight.

Oracle's stock (ORCL) fell 4% on Tuesday, making it one of the worst-performing names in the S&P 500 index SPX on the day.

As access to infrastructure and computing power continue to constrain AI development, large cloud players have invested increasing amounts of money into building out data centers. But unlike hyperscalers such as Alphabet (GOOGL) (GOOG), Amazon.com (AMZN), Meta Platforms (META) and Microsoft (MSFT), Oracle has higher debt levels that bring additional risk to its AI spending plans.

Complex financing strategies have emerged to help companies spend beyond what their cash flows would normally allow. On Monday, Nvidia (NVDA) announced strategic partnerships with major Wall Street private-equity and asset-management names to deploy over $500 billion through dedicated compute financing platforms.

This initiative, along with other financing strategies, has raised concerns that Nvidia is artificially stoking demand for its own products. And Oracle remains in an especially vulnerable position in the overall AI ecosystem - with almost half of its $638 billion backlog stemming from a single customer, OpenAI.

The company's AI financing strategy has been an overhang on the stock this year, as it has turned to debt and equity issuances to fund its cloud buildout. Shares of Oracle are down 26% year to date, and have fallen over 40% from their June peak of $248.15.

In June, Oracle reported that its free cash flow for fiscal 2026 was negative $23.7 billion. Investors are concerned that the company's increasing capital expenditures are straining its balance sheet and potentially pushing its credit rating below investment grade.

In addition to the stock's performance, AI spending concerns are showing up in the credit market. Last month, S&P Global downgraded Oracle's credit rating to BBB-, from BBB, on weaker free operating cash flow than previously anticipated for fiscal 2027.

Oracle's five-year credit-default-swap spread - a measure of the cost to insure the company's debt against default- surged to a high of 219 basis points in late July. That represents its highest level since at least September 2020, according to LSEG data. As of Monday, Oracle's five-year CDS spread was 198 basis points.

For Oracle, the "top priority" is maintaining an investment-grade credit rating, Deutsche Bank analyst Brad Zelnick wrote in a note last week. As a result, the company could rely more heavily on stock issuances for future funding. For fiscal 2027, it plans to raise $40 billion through a combination of debt and equity, including an at-the-market equity program of up to $20 billion.

Zelnick expects Oracle's capex to peak over the fiscal 2027 to 2028 period. However, he acknowledged that a lack of clarity surrounding its future spending plans means that "the possible range of outcomes is wider." As a result, investors are hesitant to focus on long-term business fundamentals until management provides a clearer AI spending and monetization road map, he noted.

-Christine Ji

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-11-26 1632ET