The heavy cost of betting on AI: Oracle's debt surges, market value evaporates by over $250 billion in a month

Oracle is paying the price for its aggressive AI strategy. The company has been hit hard in the recent tech stock sell-off, and its strategy of heavily borrowing to transform into artificial intelligence has made Wall Street uneasy, with stock and bond prices falling significantly more than its peers.

On Thursday (November 13), the Nasdaq index fell by 2.3%, and Oracle's stock dropped by 4.2% that day, making it one of the hardest-hit companies in the latest round of tech stock sell-offs. In the past month, Oracle's stock price has plummeted nearly 30%, almost double the decline of Meta, the second worst-performing large-scale cloud service provider.

This drop has erased more than $250 billion in market value gained since the company disclosed its partnership with OpenAI in September last year. At the same time, the Oracle bond price index has fallen about 6% since mid-September, significantly underperforming all major peers.

Analysts point out that investor concerns about Oracle are primarily focused on its aggressive capital expenditures, which have led to a surge in debt. The company's long-term debt has skyrocketed from $75 billion a year ago to about $96 billion, with Morgan Stanley predicting this figure will soar to around $290 billion by 2028.

Oracle's "all-in" AI strategy stands out particularly against a backdrop of increasing caution in the market regarding the massive capital expenditures of tech giants. Analysts warn that the company is overly reliant on a few AI startup clients, especially OpenAI, which poses a significant credit risk.

Oracle's Aggressive All-In AI Strategy

Oracle's entry into the AI race is extremely aggressive. The company claims that its agreement with OpenAI will generate $300 billion in revenue between 2027 and 2032. According to forecasts compiled by S&P Visible Alpha, its infrastructure business revenue is expected to grow more than tenfold by 2029.

However, this transformation marks a fundamental shift in Oracle's business model. Alex Haissl of Rothschild & Co Redburn points out:

"This is completely different from the cloud service model favored by investors. These deals look great from a revenue perspective, but they are extremely capital-intensive and create almost no value."

Oracle's shift to cloud computing came much later than its competitors, and its strategy has increasingly focused on a comprehensive bet on AI, largely depending on the success of OpenAI.

The market is concerned about the massive capital expenditures of a few large tech companies, fearing that if loss-making AI startups like OpenAI and Anthropic fail to deliver on their promises, these investments could backfire.

A long-time short seller tracking Oracle's stock stated:

"(Oracle founder) Ellison's current spending approach has completely deviated from the norm. The market is clearly no longer interested in companies that are endlessly burning cash on AI."

Debt Surge: Financial Structure Raises Red Flags

Oracle is rapidly expanding its capacity through aggressive debt financing.

According to Bloomberg data, the company's long-term debt has increased from $75 billion a year ago to approximately $96 billion. Morgan Stanley predicts that this figure will soar to about $290 billion by 2028.

Oracle issued $18 billion in bonds last September and is currently negotiating $38 billion in debt financing with several U.S. banks.

Its financial structure is the most fragile among the five major cloud service 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 exceeding Amazon's 50% and Microsoft's 30%.

Although all five companies have seen their cash asset ratios significantly decline amid a spending spree, Oracle's ratio is the lowest to date.

Rating Agencies Issue Frequent Warnings

Meanwhile, Oracle's aggressive expansion strategy has begun to raise warnings from credit rating agencies.

JPMorgan analysts pointed out that "there is a contradiction between Oracle's ambitious AI construction goals and the limitations of its investment-grade balance sheet."

According to a Wall Street Journal article, Barclays analysts downgraded Oracle's bond rating from market neutral to underweight this week, warning that its massive spending on AI infrastructure has exceeded its free cash flow.

Credit rating agency Moody's noted that the company's reliance on a few AI companies poses significant risks. S&P Global warned 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 huge liability and credit risk for Oracle. Your primary and largest customer is a venture-backed startup," said Andrew Chang, a director at S&P Global.

Analysts also noted that Oracle's data center lease terms are much longer than the contracts for selling computing power to OpenAI.

The company has signed at least five long-term lease agreements for U.S. data centers that will ultimately be used by OpenAI, resulting in $100 billion in off-balance-sheet lease commitments. These projects are at various stages of construction, with some expected to break ground only next year