AI Sector's Debt Gamble: Oracle's Credit Crisis Signals Industry-Wide Strain

Oracle (ORCL) stock faces mounting pressure as Morgan Stanley warns that credit risk for the database giant is nearing record levels, driven by its aggressive artificial intelligence (AI) spending spree. The firm's five-year credit default swaps (CDS), a gauge of default risk, hit a three-year high in November, with analysts projecting further deterioration unless Oracle can reassure investors about its debt-heavy strategy. This follows a recent downgrade of Oracle's price target by DA Davidson to $200 from $300, citing concerns over the company's reliance on OpenAI for a surge in remaining performance obligations (RPO). The research firm noted that Oracle's shares have fallen 9.17% in the past week, underscoring growing unease in the market.

The warnings come amid Oracle's unprecedented borrowing to fund AI infrastructure. The company has secured a $18 billion investment-grade bond offering this year and is part of a $38 billion project finance loan to build data centers in New Mexico and Texas. Morgan Stanley analysts Lindsay Tyler and David Hamburger highlight that Oracle's balance sheet is under strain, with free cash flow expected to turn negative $9.7 billion in the current fiscal year, a trend that could worsen to $24.3 billion by fiscal 2028. Meanwhile, UBS forecasts global AI spending to reach $375 billion this year, with Oracle's $500 billion RPO commitment - part of a broader U.S. AI infrastructure push - drawing scrutiny as part of a sector-wide debt binge https://www.forbes.com/sites/daniellechemtob/2025/11/25/forbes-daily-googles-ai-winning-streak-continues-amid-stunning-rebound/.

Despite the red flags, some analysts remain bullish. HSBC reiterated a "Buy" rating for Oracle, emphasizing its $500+ billion RPO backlog and disciplined execution against AI infrastructure goals. The firm argues Oracle's partnerships with cloud leaders like Google, Amazon, and Microsoft provide a competitive edge. However, the market's skepticism is evident: Oracle's forward P/E ratio of 29.4 exceeds its industry average of 22.21, and its PEG ratio of 1.81 suggests investors are paying a premium for growth expectations. The stock has fallen 28.83% in the past month, lagging both the S&P 500 and tech-heavy Nasdaq indices.

The broader AI sector is also grappling with debt risks. Amazon, Alphabet, and Microsoft have collectively raised $108 billion in debt this year, with Oracle's $18 billion in high-grade borrowing standing out as a barometer for AI-related credit stress. S&P Global Ratings recently downgraded its outlook on Oracle to "negative," citing strained credit metrics from AI capital expenditures. Morgan Stanley warns that without clearer communication on its financing strategy, Oracle's CDS could approach 2 percentage points by year-end, nearing the 2008 record high of 1.98.

As the AI race intensifies, Oracle's ability to balance growth with financial stability will be critical. With free cash flow projected to remain negative for the next three years and a $35 billion capex plan for 2025, the company's path to profitability hinges on converting its AI investments into sustainable revenue streams. For now, investors are watching closely, with Morgan Stanley's warnings and DA Davidson's cautionary downgrade signaling a pivotal moment in Oracle's AI-driven transformation.