Oracle Stock Is Falling and Default Insurance Prices Are Rising. Why It’s the Focus of AI Fears.

Oracle is spending heavily on data centers to power artificial-intelligence technology. (Courtesy Oracle)

Key Points

• Oracle’s five-year credit default swaps rose to 135 basis points, a 50% increase in one month, indicating higher perceived default risk.
• Oracle’s projected capital expenditure for AI infrastructure increased to $50 billion from $35 billion for the current fiscal year.
• Credit credit-rating firms S&P and Moody’s issued negative outlooks for Oracle, citing the impact of cloud infrastructure on free cash flow.

Oracle is on the front line of fears about a bubble in spending on artificial intelligence. The cost of insuring against a potential default by the software and cloud-computing company is rising.

The company’s five-year credit default swaps trade at around 135 basis points on Friday according to FactSet, up 50% in a month. They moved sharply higher after Oracle’s earnings when the company flagged that spending on AI infrastructure would drive its capital expenditure to $50 billion in its current fiscal year, from a previous forecast of $35 billion.

A credit default swap acts as insurance for corporate debt, with the buyer receiving a payout if the company can’t repay its bonds. Higher prices—or spreads—typically mean the market is pricing in a greater default risk. Credit-default swaps on single companies can be volatile because they are often thinly traded.

Oracle had around $90 billion in long-term debt as of August and issued $18 billion in bonds in September. Its five-year credit defaults swaps hit a 16-year high on Thursday according to Bloomberg, and are about four times more expensive than equivalent instruments for Microsoft , Amazon.com and Google-parent Alphabet, all of which are also spending heavily on AI data centers.

Credit-ratings firms S&P and Moody’s have both issued negative credit rating outlooks for Oracle in recent months, citing the effects of building cloud infrastructure on its free cash flow. Oracle had a free cash flow loss of $13 billion in the past 12 months, with $10 billion of that coming in the latest quarter.

One particular concern is Oracle’s dependence on spending by ChatGPT-developer OpenAI, which accounts for the majority of Oracle’s $523 billion in remaining performance obligations, or contracted revenue not yet recognized.

In a report last week, Moody’s noted that “Oracle has the highest exposure to OpenAI and has the weakest credit metrics among investment-grade hyperscalers.”

Oracle shares were down 2.9% in morning trading and have fallen 34% over the past three months. Oracle didn’t immediately respond to a request for comment on Friday.

Oracle executives said on their earnings call on Wednesday that the company is committed to maintaining its investment-grade debt rating and the borrowing required for its AI plans would be less than the $100 billion that some Wall Street analysts have modeled.

Write to Adam Clark at adam.clark@barrons.com