Oracle's High-Stakes AI Gambit: Balancing Growth and Credit Risk in a Debt-Loaded Era

Oracle's aggressive pivot toward artificial intelligence (AI) has positioned it as a key player in the next phase of cloud computing, but the company's financial health is now under intense scrutiny. As it pours billions into AI infrastructure and data centers, Oracle faces a precarious balancing act: leveraging speculative growth opportunities while managing a ballooning debt load that threatens its investment-grade credit status. For investors, the question is whether Oracle can sustain its AI-driven transformation without sacrificing financial stability-or if its current trajectory will force a painful reckoning with credit rating agencies.

The Debt-Driven AI Expansion

Oracle's fiscal 2026 Q2 results underscored both the promise and peril of its strategy. Cloud Infrastructure (IaaS) revenue surged 68% year-over-year to $4.1 billion, while Remaining Performance Obligations (RPO) ballooned to $523 billion, a 438% increase driven by long-term contracts like a $300 billion deal with OpenAI. These figures highlight robust demand for AI and cloud services but also reveal a company locked into massive capital expenditures.

Capital expenditures for fiscal 2026 are now projected at $50 billion, up sharply from earlier forecasts, as Oracle races to build out data centers and GPU capacity. This spending has pushed its debt load to $108.1 billion, with net-debt-to-EBITDA ratios exceeding 600%. Credit rating agencies have taken notice: S&P and Moody's have both placed Oracle's ratings on negative outlook, warning that leverage could surpass 4x debt-to-EBITDA by 2027–2028-a threshold that could trigger a downgrade to speculative grade according to analysis.

The Free Cash Flow Dilemma

Oracle's financial strain is further compounded by a collapse in free cash flow. For the trailing twelve months, levered free cash flow is estimated at -$10.21 billion to -$13 billion, and Q2 2026 saw a free cash outflow of $10 billion. This negative cash flow reflects the upfront costs of building AI infrastructure, which Oracle is funding through debt. The company has reportedly sought up to $38 billion in additional borrowing to sustain its expansion, raising concerns about its ability to service debt amid rising interest rates.

The risks are amplified by Oracle's reliance on a handful of large AI clients. Analysts warn that one client alone could account for nearly one-third of Oracle's revenue by 2028, creating execution risk if key projects face delays or demand wanes. This concentration, combined with Oracle's aggressive CapEx, has led to a surge in bond market volatility. The cost of insuring Oracle's debt via credit default swaps (CDS) has spiked to 125 basis points, nearing levels last seen during the 2008 financial crisis.

A Divided Analyst Outlook

Despite these challenges, Oracle's long-term AI thesis remains compelling. CEO Safra Catz highlighted a record $48 billion in sales contracts and an expanding AI deal pipeline during Q3 2025 earnings, while Larry Ellison emphasized a "chip neutrality" strategy to manage costs and capacity (https://www.insiderfinance.io/news/oracle-earnings-fall-as-ai-spending-raises-concerns). Some analysts argue that Oracle's $523 billion RPO represents a future revenue stream that could justify current leverage, particularly as AI adoption accelerates (https://www.fool.com/investing/2025/12/15/oracle-shares-have-plunged-should-investors-buy-th/).

However, skepticism persists. JPMorgan has labeled Oracle a "show me story" on its AI debt bet, citing concerns about converting a $523 billion backlog into profitable revenue. Wall Street's mixed reaction to Oracle's Q3 earnings-despite 34% cloud revenue growth-reflected this divide. Shares fell 11% after the report, as investors grappled with the company's $12 billion in CapEx and uncertain path to positive cash flow (https://www.insiderfinance.io/news/oracle-earnings-fall-as-ai-spending-raises-concerns).

The Path Forward: Growth vs. Prudence

Oracle's ability to navigate this crossroads will hinge on two factors: the pace of AI adoption and its financial discipline. On the growth front, the company's "chip neutrality" approach and partnerships with AI startups could position it as a leader in the AI infrastructure race. On the prudence side, Oracle must demonstrate that it can reduce leverage without stifling innovation. A 25% dividend increase announced in Q2 2026 signals confidence, but it also raises questions about whether the company is prioritizing shareholder returns over debt reduction.

Credit rating agencies are watching closely. Fitch has noted that Oracle's EBITDA leverage could dip to 3.5x in 2026, offering a temporary reprieve, but analysts caution that this improvement may be short-lived. If Oracle's free cash flow remains negative or its leverage ratio breaches 4x, a downgrade to junk status could become inevitable. Such a move would increase borrowing costs and erode investor confidence, potentially derailing its AI ambitions.

Conclusion

Oracle's AI-driven transformation is a high-stakes gamble with the potential to redefine the cloud computing landscape. For now, the company remains in investment-grade territory, but its financial margins are narrowing. Investors must weigh the allure of long-term growth against the immediate risks of overleveraging. As Oracle races to build the infrastructure of the future, the question is whether it can do so without sacrificing the financial stability that has long been its hallmark.