Oracle downgraded near junk as AI capex swamps cash flow
S&P Global cut Oracle's credit rating to one notch above junk status as massive artificial intelligence infrastructure spending drains cash and pushes shares to a 52-week low.
Oracle shares fell to $121.50 on Friday, a 52-week low that leaves the database and cloud infrastructure company trading 63% below its peak of $345.72. The drop to a $365 billion market capitalization followed a July 9 move by S&P Global Ratings to cut Oracle's credit from BBB to BBB-. The agency placed the rating one notch above junk, citing the enormous cost of the company's AI infrastructure build-out.
The financial mechanics of that build-out are now straining the balance sheet. In fiscal 2026, which ended May 31, Oracle spent $55.7 billion on capital expenditures. While operating cash flow grew 54% year over year to reach $32 billion, it was vastly insufficient to cover the spending. Oracle posted negative $23.7 billion in free cash flow for the year and ended the period carrying nearly $130 billion in total borrowings.
S&P projects the cash shortfall will only widen. The agency forecasts Oracle's fiscal 2027 capital expenditures will reach $90 billion to $95 billion, pushing the free operating cash flow deficit to approximately $42 billion. To bridge this gap, the company issued $5 billion of mandatory convertible preferred stock in February and has outlined plans for another $20 billion equity issuance later this calendar year.
A severe customer concentration risk further complicates the credit profile. Roughly half of Oracle's $638 billion in remaining performance obligations comes from a single client: OpenAI. "If the ChatGPT maker ever struggles to fund its commitments, Oracle could be left holding data centers built for demand that never arrives." That, to me, is the sharpest risk on the list.
Management continues to guide for robust revenue, targeting roughly 34% growth to $90 billion this fiscal year. Yet the heavy depreciation and interest costs associated with the build-out are compressing margins. The company guided for non-GAAP earnings per share of $8.05, an 18% increase that represents barely half the pace of revenue growth. Oracle shares now trade at roughly 16 times that earnings figure, reflecting a market that is weighing AI potential against immediate financial reality.
