Oracle (ORCL) is on the front line of intense investor fears about a spending bubble in artificial intelligence, with the cost of insuring its massive debt against default rising dramatically. The company’s stock has fallen 2.9% in morning trading and is down 34% over the past three months.
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The major trigger for this financial anxiety was Oracle’s recent earnings report, where it revealed that its capital expenditure for AI infrastructure would soar to $50 billion in the current Fiscal year, up sharply from a previous forecast of $35 billion.
Default Swaps Surge 50% amid AI Debt Fears
The cost of insuring Oracle’s debt, tracked by five-year credit default swaps (CDS), has spiked dramatically, rising to around 135 basis points (bps), a 50% increase in just one month. Higher CDS prices signal that the market is pricing in a significantly greater default risk.
For context, Oracle’s debt insurance is now about four times more expensive than equivalent instruments for its hyperscaler rivals, including Microsoft (MSFT), Amazon.com (AMZN), and Alphabet (GOOGL). This alarming disparity is why some analysts view Oracle’s CDS movement as a crucial signal—the “canary in the coal mine”—for the sustainability of the entire Big Tech debt-fueled AI spending spree.
Oracle’s Weak Cash Flow and OpenAI Dependence Raise Red Flags
The AI spending is severely impacting Oracle’s financial health, which has around $90 billion in long-term debt. Credit-rating firms S&P and Moody’s (MCO) have both issued negative credit rating outlooks for the company, citing the major strain of building cloud infrastructure on its free cash flow. Oracle had a free cash flow loss of $13 billion in the past 12 months.
Moody’s also noted a major risk factor: Oracle’s dependence on contracted spending from ChatGPT-developer OpenAI, which accounts for the majority of the company’s $523 billion in remaining performance obligations (RPO). Moody’s stated that “Oracle has the highest exposure to OpenAI and has the weakest credit metrics among investment-grade hyperscalers.”
Despite the rising default fears and rating warnings, Oracle executives defended the spending, stating they are committed to maintaining an investment-grade debt rating. They also stated that the borrowing required for its AI plans would be less than the $100 billion that some Wall Street analysts have modeled.
Is Oracle a Good Stock to Buy?
Wall Street’s consensus rating for Oracle (ORCL) is a Moderate Buy. This rating is based on 34 analysts who have weighed in over the last three months, with 22 analysts recommending a Buy, 11 recommending a Hold, and only one analyst recommending a Sell. The average 12-month ORCL price target is set at $302.10, which suggests a significant 61.83% upside from the last closing price.
