Oracle shares keep falling as investors fret over AI debt

Oracle ↗ 0.49% shares have kept falling in October. Investors are questioning how the company will pay for a data center expansion that already runs on borrowed money, new stock and cash paid in advance by customers. The stock fell again on Wednesday, Oct. 21, and ended the session below $130, according to MarketBeat. It is down about 34% so far this year. Even so, several Wall Street analysts say the drop has gone too far, Barron's News Corp ↘ 0.53% reported Thursday.npr.org+2

A costly buildout

Oracle has taken on large loans to build AI capacity, and its investors are unhappy about the growing debt, NPR reported. The company has issued $118 billion in long-term debt and carries another $39 billion in capital and lease obligations, according to FactSet data cited by CNBC Comcast Corporation ↘ 0.66%. In its first quarter of fiscal 2027, Oracle sold $20 billion of new common stock through an at-the-market program. It also said the new contracts do not change its plans to raise capital.npr.org+2

Free cash flow was negative $5.4 billion in the quarter, on capital spending of $28.5 billion. About $11.4 billion of that spending was covered by customer prepayments. Asked when free cash flow would turn positive, management said it had not "given a particular timeframe on that yet".money.usnews.com+1

The pressure grew on Oct. 14. That day Oracle closed down 8.8% after hotter-than-expected inflation data and a spike in CoreWeave ↘ 2.46% bond yields hit AI stocks across the market.finance.yahoo.com

Credit and OpenAI risks

S&P Global ↘ 0.62% cut Oracle to BBB- in July, the lowest investment-grade rating. Oracle's five-year credit default swap spreads now look more like those of high-yield borrowers, CNBC reported. Jim Reid of Deutsche Bank ↘ 0.89% warned that a downgrade to junk "would risk pressuring IG-only investors into forced sales."cnbc.com

Much of Oracle's $664 billion backlog is tied to OpenAI. That means Oracle could be left with data centers that are hard to fill if the startup cuts back its spending. Oracle is also reportedly in talks with Apollo ↘ 1.74% and Goldman Sachs The Goldman Sachs Group, Inc. ↘ 1.75% about a structure where outside investors would buy the AI chips and lease them to Oracle.thestreet.com+1

The bull case

Most analysts remain positive. Of the 43 covering the stock, 31 rate it a "Strong Buy," with an average price target of $242.22. Cloud infrastructure revenue rose 121% last quarter. Management also said most new contracts are structured as prepaid or bring-your-own-hardware deals, which moves capital costs onto customers.finance.yahoo.com+1

"What Oracle really needs is … time," Jamie Meyers of Laffer Tengler told CNBC. Oracle told CNBC that keeping its investment-grade rating "is our first priority."cnbc.com