Oracle's credit rating cut to BBB- as AI capex hits $95 billion

Oracle's $638 billion backlog of cloud contracts wasn't enough to shield its credit rating from the cost of building the AI infrastructure to fulfill them.

S&P Global Ratings cut Oracle Corp.'s long-term issuer credit rating to BBB- from BBB on Thursday, leaving the software giant one notch above speculative grade. The downgrade reflects what S&P called "rising structural risk" from Oracle's pivot into artificial intelligence infrastructure, a bet that requires unprecedented capital spending.

"The company's fiscal 2027 capital expenditures will reach $90 billion to $95 billion, nearly double our prior $60 billion estimate," S&P said in its rating action. The ratings agency projected a free operating cash flow deficit of $42 billion for that year, up from an earlier forecast of $24 billion, with adjusted debt-to-leverage ratios expected to hit the mid-4x area — above the threshold S&P considers safe for a BBB profile.

Oracle shares rose 2.7% on Thursday as investors focused on the company's $638 billion backlog of remaining performance obligations, a figure that grew 363% over the past year. That backlog, which includes $67 billion in AI infrastructure contracts signed in the most recent quarter alone, provides what management calls "exceptional visibility" into future revenue. The company has forecast total revenue growth of 34%.

The $167 Billion Debt Question

The downgrade exposes a tension at the heart of Oracle's AI strategy: the company is spending aggressively to capture a market that may not materialize as quickly as it expects. OpenAI alone accounts for roughly half of Oracle's remaining performance obligations, creating extreme customer concentration risk. If the AI startup's growth trajectory falters, Oracle's revenue visibility collapses alongside it.

To fund the buildout, Oracle is turning to equity dilution. After a $5 billion mandatory convertible preferred stock issuance in February, the company plans an additional $20 billion equity offering later this year, with expectations to raise tens of billions more over the next three years. Total debt stands at $167 billion.

The spending is not speculative — it funds pre-sold contracts. But the gap between when Oracle pays for data centers and when it recognizes revenue from those contracts is widening. S&P's $42 billion free cash flow deficit projection for fiscal 2027 captures that timing mismatch.

What the Market Is Missing

Oracle's stock has fallen 36.9% year to date, even as the broader market has risen. The selloff reflects investor anxiety about the scale of the spending and its impact on near-term margins. But the $638 billion RPO — contractually guaranteed future revenue, not pipeline or forecast — suggests the market may be discounting the certainty of that revenue while pricing in the risk of the spending.

For investors, the key metric to watch is the conversion rate of RPO into recognized revenue. If Oracle can convert that backlog at the pace management expects, the current valuation may prove too pessimistic. If customer concentration or execution delays slow that conversion, the equity dilution required to bridge the cash deficit will compound the damage.

Oracle shares trade at roughly 15x forward earnings, a discount to Microsoft's 28x and Amazon's 32x, reflecting the market's skepticism about the AI spending thesis. The BBB- rating, while still investment grade, may trigger forced selling by institutional funds with minimum credit rating requirements, adding another headwind to the stock.

This article is for informational purposes only and does not constitute investment advice.