Oracle just set a dubious record.
So why the jump in nerves? Two things happened at once.
Recently, S&P Global Ratings cut Oracle's credit rating to BBB-, just one step above junk status.
Second, a broad selloff hit technology shares on Friday after a Chinese startup unveiled an AI model, sparking worries that other models might become obsolete.
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The negative cash flow marks a sharp reversal from Oracle's historically strong cash generation, which had long been a pillar of its investment-grade credit profile. The company's pivot to AI has required massive upfront spending on GPU clusters and data center construction, with costs far exceeding initial projections. Meanwhile, the competitive landscape is intensifying as cloud rivals like Microsoft and Amazon also invest heavily, putting pressure on Oracle to keep pace or risk losing market share.
Oracle had long been known for its reliable cash flows and conservative financial management, which allowed it to maintain an investment-grade rating for decades. However, the company's aggressive entry into the AI and cloud computing markets has required unprecedented capital expenditures, straining its balance sheet and eroding the very cash generation that underpinned its creditworthiness. This shift has left investors questioning whether the long-term payoff will justify the near-term financial strain.
S&P Global Ratings has already taken notice. According to S&P, the firm has frequently underestimated the amount of immediate funding Oracle required for artificial intelligence.
Oracle's approximately $117 billion in bonds are part of Bloomberg's benchmark index for US high-grade corporate debt, where it ranks as the largest non-financial issuer.
Credit default swaps (CDS) are essentially insurance contracts against a company defaulting on its debt. When the cost of protection rises, it signals that the market sees a higher probability of default. Oracle's CDS now costs nearly 200 basis points annually to insure $10 million of bonds, a level that has historically been associated with companies under severe financial stress.
The negative free cash flow is especially troubling because it means Oracle is spending more than it earns from operations, forcing it to rely on debt or equity markets to fund its AI ambitions. While the company's revenue from cloud services continues to grow, the upfront costs of building out AI infrastructure have outpaced cash generation. S&P's downgrade to one notch above junk puts Oracle on the edge of the investment-grade universe; any further downgrade would push it into high-yield territory, potentially raising borrowing costs for its $117 billion bond pile.
Investors are now watching closely to see whether Oracle can convert its AI spending into sustainable profits before the market's patience runs out.
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