Oracle's AI Debt Expansion: A High-Risk Bet or Strategic Move for Long-Term Dominance?

Oracle's aggressive foray into AI infrastructure has sparked a heated debate among investors and analysts. The company's recent $38 billion debt raise-adding to an already staggering $104 billion in outstanding debt-has triggered bond sell-offs and rising credit default swap (CDS) spreads, signaling investor unease. Yet, Oracle's management and some analysts argue that this capital-intensive strategy is a necessary bet to secure dominance in the AI-driven cloud era. This article examines the tension between Oracle's mounting credit risk and its projected growth in AI and cloud infrastructure, drawing on recent financial disclosures and market reactions.

The Debt Burden and Credit Risk

Oracle's debt load has ballooned as it races to build out AI infrastructure, with net adjusted debt projected to reach nearly $290 billion by 2028. This borrowing spree has caused its five-year CDS to spike to an 80-basis-point two-year high, reflecting heightened default fears. Critics argue that Oracle is overextending itself, relying on speculative future AI-driven revenue to service debt. For context, the company's operating cash flow has been insufficient to cover its spending, as it prioritizes long-term contracts with startups like OpenAI over short-term profitability.

Investor skepticism is further fueled by accounting practices. Michael Burry, the "Big Short" investor, has highlighted how Oracle and peers may be artificially smoothing earnings by stretching depreciation schedules for AI assets. This could understate depreciation by $176 billion between 2026 and 2028, inflating reported profits. Such practices, while common in capital-intensive industries, risk misleading investors about the true cost of Oracle's AI ambitions.

Growth Potential: Cloud and AI Momentum

Despite the debt concerns, Oracle's Q3 FY 2025 earnings report reveals a compelling growth story. Cloud revenue surged 23% year-over-year to $6.2 billion, driven by a 49% increase in Oracle Cloud Infrastructure (OCI) revenue to $2.7 billion. The company's Remaining Performance Obligations (RPO)-a key indicator of future revenue-jumped 62% to $130 billion, with management projecting a 15% revenue boost in FY 2026.

Oracle's AI infrastructure is scaling rapidly, with GPU consumption for AI training rising 244% YoY. Strategic partnerships, such as a multi-billion-dollar deal with AMD, to build a 30,000-GPU cluster, underscore its commitment to outpacing rivals. CEO Safra Catz has set audacious targets, forecasting OCI revenue to reach $18 billion in 2026 and $144 billion by 2030. These projections are supported by a 359% surge in RPO to $455 billion, driven by major AI contracts with OpenAI, Meta, and AMD.

Analysts like Jefferies and Stifel have raised price targets to $365 and $350, respectively, citing Oracle's ability to reduce AI compute costs and expand its global data center footprint from 34 to 71 multicloud hubs. However, Morgan Stanley and Erste Group caution that heavy capital expenditures could pressure free cash flow and margins.

Balancing the Risks and Rewards

Oracle's strategy hinges on a critical assumption: that AI-driven cloud demand will grow fast enough to justify its debt load. The company's $16 billion capital expenditure plan for FY 2025-nearly double the previous year's-reflects this bet. Yet, as one analyst noted, "AI infrastructure returns take years to materialize, and Oracle's debt clock is ticking".

The key question is whether Oracle's growth projections are realistic. While its cloud revenue growth (23% YoY) outpaces many peers, the path to $144 billion in OCI revenue by 2030 requires sustained execution in a hyper-competitive market. Amazon, Microsoft, and Google are also investing heavily in AI, and Oracle's debt-driven expansion could backfire if market share gains fall short.

Conclusion: A High-Stakes Gamble

Oracle's AI debt expansion is a double-edged sword. On one hand, the company is leveraging aggressive capital spending to position itself at the forefront of the AI revolution, with strong RPO growth and strategic partnerships validating its vision. On the other, its ballooning debt and opaque accounting practices raise red flags about credit risk and earnings sustainability.

For investors, the decision to back Oracle hinges on their risk tolerance. If the company succeeds in monetizing its AI infrastructure, the rewards could be transformative. But if AI adoption slows or debt servicing becomes untenable, the fallout could be severe. In the end, Oracle's bet is a high-stakes gamble-a test of whether its long-term vision can outpace the short-term risks of its financial strategy.