Oracle's AI-fueled debt load has investors on edge ahead of quarterly earnings

This year has been a tumultuous journey for Oracle shareholders as they evaluate the tech giant's standing amidst the booming artificial intelligence landscape. Despite a significant 23% drop in October—its steepest decline since 2001—the company's stock has rebounded, showing over a 30% increase for the year and nearly a 10% rise in November alone. As Oracle approaches the release of its fiscal second-quarter earnings report, all eyes are on the newly appointed CEOs, Clay Magouyrk and Mike Sicilia. Investors are eager to see how the company plans to finance its ambitious infrastructure projects while maintaining confidence in its narrative of AI-driven hypergrowth. Oracle's prominence in the AI sector has surged, particularly following a monumental $300 billion deal with OpenAI, which was revealed in September. This agreement will see OpenAI purchasing computing power over a five-year span starting in 2027. However, this ambitious expansion comes with a substantial financial burden; Oracle's infrastructure buildout is expected to be heavily financed through debt. In late September, the company executed a massive bond sale, raising $18 billion—one of the largest debt issuances recorded in the technology sector. Presently, Oracle stands as the leading issuer of investment-grade debt among non-financial corporations, as reported by Citi. Daniel Sorid, head of U.S. investment-grade credit strategy at Citi, expressed concern about the scale of capital required for such transformative projects during a recent investor call. Oracle has secured billions in loans from a consortium of banks to fund construction of data centers in New Mexico and Wisconsin. Citi analyst Tyler Radke estimates that the company may need to raise between $20 billion and $30 billion annually over the next three years. As of August, Oracle's total debt, including lease obligations, had escalated to $111.6 billion, up from $84.5 billion the previous year, while its cash reserves slightly diminished. Amidst this backdrop, the market is questioning whether Oracle will explore funding avenues beyond traditional debt markets. RBC Capital Markets analyst Rishi Jaluria suggested that Oracle might consider various options, including off-balance sheet facilities, equity issuance, or even engaging foreign investors like sovereign wealth funds. Investors are also analyzing whether Oracle could leverage vendor financing to alleviate upfront capital costs for building data centers by negotiating favorable terms with suppliers such as Nvidia. However, this strategy raises concerns about GPU depreciation if Nvidia's chips were used as collateral. The mounting anxiety surrounding Oracle's credit status has pushed its five-year credit default swaps to multi-year highs, reflecting a growing caution among investors. These swaps act as a form of insurance against the risk of default, and their rising popularity highlights the cautious sentiment in the AI investment landscape. Analysts from Barclays and Morgan Stanley have recommended purchasing Oracle's five-year CDS, signaling a belief in the potential risks ahead. As Oracle prepares to report its earnings, revenue growth and business backlog will be under close scrutiny. Analysts anticipate revenue for the latest quarter to range between $15 billion and $16.2 billion. Additionally, expectations for remaining performance obligations—contracted revenue yet to be recognized—are projected to exceed $500 billion, marking a more than fivefold increase from the previous year. The stock's response to Oracle's earlier disclosure of a 359% jump in RPOs to $455 billion was significant, propelling shares up 36% in a single day, the most remarkable surge since 1992. However, since that peak, the stock has experienced a notable decline. Investors will also keep an eye on Oracle's core database business, which offers higher margins and could influence its ability to navigate capital markets. Analyst Gil Luria from D.A. Davidson believes Oracle can manage its debt but emphasizes the need for increased cash flow to support future capital raising efforts. As the company looks to articulate its execution strategies rather than mere promises, the upcoming earnings report will be pivotal in shaping investor sentiment moving forward.