TLDR: Credit rating agency Moody’s has highlighted significant financial risks associated with Oracle’s recently secured $300 billion in AI contracts, primarily a massive five-year deal with OpenAI. While acknowledging the immense potential of Oracle’s AI infrastructure business, Moody’s points to high counterparty risk due to heavy reliance on a few clients, particularly OpenAI, and potential increases in leverage and negative free cash flow as Oracle funds its extensive data center expansion.
Moody’s Ratings has issued a cautionary note regarding Oracle Corp.’s recently signed artificial intelligence (AI) contracts, totaling an estimated $300 billion. These contracts, predominantly a five-year agreement with OpenAI for computing power, underscore the ‘tremendous potential’ for Oracle’s AI infrastructure business, yet also present substantial financial risks, according to the credit rating agency.
Oracle had previously announced expectations for its Oracle Cloud Infrastructure business to exceed half a trillion dollars in booked revenue. Reports indicate that a significant majority of this new revenue, specifically the $300 billion in new contracts, will stem from the deal with OpenAI. This particular contract, set to commence in 2027, involves annual expenditures of approximately $60 billion from OpenAI, accounting for nearly 95% of the future contract revenue Oracle added in its first fiscal quarter.
Moody’s analysts have identified several key areas of concern. A primary risk is ‘counterparty risk,’ emphasizing Oracle’s heavy reliance on a limited number of AI companies to fund its ambitious data center expansion. Moody’s stated, ‘Counterparty risk is always a key consideration in any type of project financing, particularly where there is a high reliance on revenue from a single counterparty.’ The agency further characterized Oracle’s data center build-out as ‘effectively one of, if not the world’s largest, project financing,’ inherently carrying significant risks.
Financially, Moody’s projects that Oracle’s debt will increase at a faster rate than its EBITDA (earnings before interest, taxes, depreciation, and amortization), potentially leading to a forecast high leverage of 4x. This could result in negative free cash flow for an extended period before the company reaches a breakeven point. The rating agency had previously revised Oracle’s credit rating outlook to negative from stable in July, citing concerns over the company’s AI infrastructure spending strategy.
Despite these flagged risks, Moody’s has stopped short of taking ratings action, such as a downgrade, against Oracle, maintaining its Baa2 issuer rating, which is at the lower end of investment-grade credit ratings. Oracle’s remaining performance obligations (RPO) surged to $455 billion, a 359% year-on-year increase, with $317 billion added in the first quarter alone. Oracle CEO Safra Catz noted the company signed four large contracts with three different customers in the previous quarter, anticipating more similar deals that could push the backlog beyond $500 billion.
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While Oracle’s stock has seen significant gains, surging 81% year-to-date and rising 1.36% to $305.51 in Thursday’s premarket trading following the news, some skepticism remains. Short-seller Jim Chanos, for instance, has reportedly likened Oracle’s backlog to past accounting controversies. There are also reports suggesting that OpenAI might face challenges in meeting its $300 billion agreement with Oracle due to potential financial struggles, adding another layer of uncertainty to these massive AI infrastructure bets.
