Moody’s flags risks in Oracle’s massive AI contracts

• Moody’s projects Oracle’s leverage ratio could hit 4x before earnings catch up, creating an extended period of high financial pressure.
• Agency believes free cash flow is likely to stay negative for quite a while, with breakeven only on the distant horizon as Oracle invests heavily to meet its obligations under these monster contracts.

It’s not every day that a single deal can reshape the financial outlook of a tech titan, but that’s exactly what’s happening at Oracle.

The company has recently set the business world abuzz with $300 billion in new artificial intelligence contract signings—most notably an enormous cloud agreement reportedly inked with OpenAI.

These contracts hint at transformative potential for Oracle’s Oracle Cloud Infrastructure, with the firm projecting booked revenue for the unit could exceed a staggering half a trillion dollars.

But while the headlines showcase ambition and scale, Moody’s Ratings is raising a cautious eyebrow. In a fresh note this week, the influential US credit rating agency acknowledged the “.tremendous potential” of Oracle’s new AI infrastructure contracts.

However, Moody’s also flagged multiple financial risks that could temper Wall Street’s excitement.

Counterparty risk—A single point of failure?

The first red flag concerns counterparty risk. By securing such an oversized commitment from just a handful of AI powerhouses, Oracle has placed a big bet on the fortunes and follow-through of a very limited group of customers.

Moody’s was especially wary of what could happen should one of these giants pull back or default. The agency likened Oracle’s ongoing global data centre construction spree to one of the world’s largest project financings—meaning there’s an awful lot riding on a few key partnerships.

As if that weren’t enough, Moody’s analysts warned about Oracle’s financial profile as the company leans into this expansion. The massive infrastructure build-out will mean debt piling up faster than the company’s earnings (EBITDA).

Moody’s projects Oracle’s leverage ratio could hit 4x before earnings catch up, creating an extended period of high financial pressure.

And there’s another caution: don’t expect a cash bonanza anytime soon. The agency believes free cash flow is likely to stay negative for quite a while, with breakeven only on the distant horizon as Oracle invests heavily to meet its obligations under these monster contracts.

What’s Oracle’s grade?

Moody’s didn’t take immediate action on Oracle’s current credit rating, holding it at Baa2—still investment grade, but just above junk status. This leaves Oracle in a somewhat precarious position: poised for AI-driven growth at a massive scale, but carrying financial risks that could quickly snowball if conditions shift.

In the end, Oracle’s AI cloud play is a high-stakes wager. Success could cement it as a foundational part of the global AI infrastructure. Missteps, on the other hand, could rattle not just Oracle’s balance sheet but the entire industry’s confidence in bold, concentrated bets on artificial intelligence.