Moody’s (MCO) Ratings has flagged significant counterparty risk for Oracle (ORCL) amid its booming AI infrastructure business. The agency pointed out Oracle’s recently signed $300 billion AI contract with OpenAI, raising concerns but did not take any ratings action. Under the five-year deal, OpenAI will purchase massive computing power (4.5 gigawatts) from Oracle, using its expanding network of AI-focused data centers.
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During its first quarter earnings call, Oracle reported that Remaining Performance Obligations (RPOs) for AI cloud infrastructure bookings jumped 359% year-over-year to $455 billion. Moreover, CEO Safra Catz hinted that with more multibillion-dollar deals underway, RPOs could soon exceed half a trillion dollars.
Moody’s Analysts Call Out Potential Risks
In July, Moody’s downgraded Oracle’s credit outlook from Stable to Negative, assigning it a Baa2 rating, the lower end of investment grade. Analysts at the time warned that Oracle’s AI cloud business relies heavily on a small group of large customers.
Continuing along the same lines, analysts noted yesterday that “Counterparty risk is always a key consideration in any type of project financing, particularly where there is a high reliance on revenue from a single counterparty.”
Historically, Oracle’s data center business has served three major but undisclosed customers. With OpenAI now added as a fourth, Moody’s warned that the company’s debt could grow faster than its EBITDA (earnings before interest, taxes, depreciation, and amortization), pushing leverage to about 4x before its EBITDA begins to catch up. They also expect free cash flow to stay negative for a long time before breaking even.
Assessing Oracle’s Risk Factors
In its latest annual filing, Oracle added a new risk factor under the Tech & Innovation section. Oracle cautioned that insufficient data center capacity or poor infrastructure management could hurt profitability. This disclosure reflects similar risks Moody’s highlighted in its assessment of Oracle’s AI data center expansion.
Is ORCL Stock a Buy, Hold, or Sell?
On TipRanks, ORCL stock has a Strong Buy consensus rating based on 24 Buys and eight Hold ratings. The average Oracle price target of $340.75 implies 13.1% upside potential from current levels. Year-to-date, ORCL stock has surged 82.4%.
