The great artificial intelligence gear with its need for enormous funding and as many doubts about their sustainability, with Oracle, is showing some writingcwhich is actually worrying the entire industry. That Oracle was spending a lot is no exception to the other tech giants like Alphabet or Meta Platforms, but the Texas-based company, leader in business software, stands out for the fact that it is burning cash at a faster rate than it generates revenue, while she is engaged in a$250 billion data center expansion of dollars.
She noticed it S&P's which last week has rating reduced at the step preceding the non-investment grade (the so-called “junk” level) and the investors are realizing it markets: on one side with the stock and bond market crash, on the other with a clear increase in insurance against the risk of default of the company, until reaching the maximum of 18 years.
According to data from Ice Data Services, the credit default swaps The company's five-year debt yield, a gauge of perceived credit risk, rose yesterday to about 2,03 percentage points on an annual basis, the highest level since the systemic crisis. 2008, surpassing the previous peak of 198,23 basis points reached last Friday.
After S&P's downgrade to one notch below "junk", Moody's is now feared
Earlier this month, S&P Global Ratings downgraded Oracle to just one notch above junk, to BBB-, citing the company's growing spending on artificial intelligence. Moody's Ratings has assigned the company a Baa2 rating with a negative outlook, which means that a further downgrade is possible in the medium term. As the credit cycle enters a more advanced phase, "it becomes increasingly difficult for some of these companies to maintain their ratings, but above all to finance their expansion," he told Bloomberg George Catrambone, head of fixed income at DWS Americas.
Yesterday the Financial Times also reported that Oracle may have to provide over $7 billion in collateral for data center in the planning stage in Wisconsin, after the state's utility regulator refused to relax credit rules for large electricity users. According to the newspaper, the project is critical to Oracle's $300 billion computing contract with OpenAI. The Wisconsin Public Service Commission's decision could increase financing costs. Oracle estimates that the requested letter of credit would cost more than $100 million annually.
La stakes are high: If the rating were to drop to “junk” level by at least two rating agencies, Oracle’s financing costs would further increase, creating a vicious cycle. “Oracle remains firmly committed to maintain an investment grade credit rating as a top priority for capital allocation,” a spokesperson said in a statement. “We remain confident and focused on executing our business plan in the coming months and years.”
The risk for Oracle is that of to fall behind in the race she had set for herself. Other giants AI companies are following a different trajectory, generating more than enough cash to finance investments. This, according to S&P, gives them "greater financial flexibility to outperform Oracle in terms of investment and weather industry downturns." The rating agency said it had so far underestimated the scale of investment Oracle would need for AI. But these investments have led the company to burn more than $20 billion in the last four quarters, net of capital expenditures.
The collapse of bonds and stocks
In parallel with the movements on CDS, the bonds Oracle's bonds weakened across the curve. Even before the S&P downgrade, Oracle's bonds were trading at yields closer to those of BB-rated bonds than those of BBB-rated securities. This week, Oracle's 10-year bonds were yielding around 6,4%, slightly lower than the 6,7% yield on 10-year BB bonds and at a significant premium to the 5,7% yield curve for 10-year BBB bonds. Oracle shares yesterday they suffered a new drop of 4% which brings the one month decline to -30%
According to research firm CreditSights, the Oracle capital expenditures should increase at least until the fiscal year 2029This forecast is not dissimilar from that of other so-called hyperscalers, including Google, Meta, Microsoft, and Amazon.com. Collectively, these companies plan to spend up to $725 billion this year alone, primarily on data center equipment dedicated to AI. Meanwhile, Chinese startups promise excellent performance at low costs. But their ability to generate cash is very different. Google For example, it recorded free cash flow of approximately $73 billion last year. The results will be published starting tomorrow. quarterly data of major US tech companies. Oracle will publish its results on September 9.
Oracle looks at new strategies to reduce cash burn
Oracle is also exploring new strategies to reduce liquidity consumption, including the request to some customers to pay in advance expensive IT components for data centers. It may need to issue new shares or reduce capital expenditures, or both, even though these are very expensive options.
Oracle in fact declared last month that it expects to raise about 40 billion of dollars through debt and equity in this fiscal year, including a sale of shares for 20 billion of dollars, previously announced. In February, it sold $25 billion in investment-grade bonds and currently holds approximately $117 billion in debt in the Bloomberg US Corporate Bond Index, making it the second-largest non-financial issuer after Amazon.
In its quarterly report, Oracle said it expects cash-financed capital expenditures to grow in the next fiscal year. S&P estimated that cash flow deficit free could expand to 42 billion of dollars in the same period. The company has accumulated a large portfolio of contracts that are expected to generate future income, but will be accounted for over time. In the meantime, the cash must be deployed immediately. This timing discrepancy is a key issue for investors. "It doesn't impact current revenue, so it will be difficult for them to resolve the situation with cash flow," said SanJac Alpha's Wells.
