Oracle Is One Step From Junk—Can It Afford the AI Boom?

Key Points

• S&P Global Ratings downgraded Oracle's credit rating to BBB-, citing a widening free cash flow deficit and heavy reliance on OpenAI for revenue.
• Microsoft, Alphabet, Amazon and Oracle are all borrowing heavily to fund AI spending, but Oracle has the weakest balance sheet and no rating cushion left.
• Oracle's negative free cash flow raises the risk of higher interest costs, fewer buybacks, and difficulty covering debt if AI demand slows.

The past few weeks have seen the bond market start asking a question the stock market has mostly been happy to ignore: Who can actually afford the AI buildout?

On July 9, S&P Global Ratings gave its answer for one of the biggest spenders. It cut Oracle Corp.'s NYSE: ORCL long-term credit rating to BBB-, the lowest rung of investment grade and just one notch above junk.

The stock has since fallen to around $125, down nearly 30% over the past month and nearly 50% over the past year.

What makes the downgrade worth more than a passing glance is what it reveals about the wider group. Every major AI spender is pouring money into building out their supply capabilities, but they're all doing it from different financial positions, and the gap between them is widening fast.

The Downgrade Isn't Really About Oracle's Business

S&P's reasoning for the Oracle downgrade was blunt.

The agency admitted it had underestimated the scale of investment required for Oracle's AI ambitions, and now expects the company's free operating cash flow deficit to widen to roughly $42 billion in fiscal 2027, nearly double its earlier forecast.

The other red flag was customer concentration. S&P estimates that around half of Oracle's $638 billion in remaining performance obligations is tied to OpenAI alone, and it described that single relationship as a key credit risk.

The concern is understandable—Oracle has taken on long-term commitments on facilities and equipment to serve OpenAI's demand, so even if the latter's payments were to slow, Oracle's obligations would still need to be paid in full.

Where Each Spender Actually Sits

So what does that mean for Oracle's peers? Well, if you put the four biggest AI spenders side by side, then the divide becomes obvious.

The top two are Microsoft Corp. NASDAQ: MSFT, which carries an AAA rating, and Alphabet Inc. NASDAQ: GOOGL, which carries an AA+ rating. Next up is Amazon.com Inc. NASDAQ: AMZN, still at the higher end of the scale at AA, while Oracle sits alone down at BBB-.

The uncomfortable answer to the question, though, is that none of them can fully fund this from existing cash generation anymore. All four have seen their free cash flow compressed dramatically by the scale of the spending, and all four have been active issuers in the bond market to help cover the gap. What separates them isn't whether they borrow, but how heavily they're leaning on it, and how much of the repayment depends on revenue that hasn't arrived yet.

The Headroom Gap

Microsoft and Alphabet started this cycle with the strongest balance sheets and the most cushion, which is why they still sit near the top of the ratings scale despite spending heavily. Amazon is only just holding on to its positive free cash flow. Still, its accelerating AWS growth is giving investors a reason to stay cautiously bullish on the spending for now.

Oracle is the only one, so far, that seems to have run out of room, and its move into negative free cash flow is a bright red flag. The leverage numbers underscore the point: Oracle sits several times above Amazon on debt-to-equity and nearly 20 times above Alphabet, which is actually running a net cash position.

More importantly, it has no rating cushion left, whereas its peers have several notches to go before their own credit standing comes under real pressure.

Why the Funding Gap Matters

This distinction appears in three places that directly impact shareholders. The first is increased interest expense. Oracle's higher risk profile means that every additional dollar of debt costs more than it would for its better-rated peers, which will hurt its profitability.

The second is a lower likelihood of buybacks. Companies generating strong free cash flow, like Alphabet, can keep buying back their shares while continuing to invest in growth, whereas negative free cash flow will make it far more difficult for Oracle to do the same.

The third is what happens if demand for AI cools. A company funding most of its capital expenditure from operations can simply spend less and wait. A company funding itself predominantly with debt still owes the money it's borrowed, regardless of whether the expected revenue arrives, and its valuation becomes far harder to defend when investors start to doubt it will.

So Who Can Actually Afford It?

Line the four up against the question, and a clear order emerges. Microsoft and Alphabet are best positioned to fund this from what the business itself generates, with the strongest balance sheets, the lowest leverage, and, in Alphabet's case, more cash than debt.

Amazon sits in the middle. It's spending more than anyone, and its cash generation is stretched thin as a result. Still, the accelerating growth at AWS suggests the money is meeting existing demand rather than demand it's hoping to create.

Oracle is the outlier on both halves of the question. It's leaning hardest on borrowing and on revenue that hasn't arrived yet, with a backlog that has to convert and a single customer accounting for around half of it. That combination is why it's the only one of the four with no rating cushion left.