Contracts worth $300 billion to take Oracle ‘s cloud business to a new level have caught the attention of analysts. While the company is celebrating the prospect of huge revenues, ratings agency Moody’s is pointing out the risks that may lurk behind this ambitious plan. Despite the concerns, no decision has been made to change the Austin-based giant’s rating for now.
Cloud power and one key customer
Oracle recently announced that it expects revenues from its flagship Oracle Cloud Infrastructure (OCI) service to exceed half a trillion dollars. As reported by The Wall Street Journal, a significant portion of this amount is expected to come from a single, albeit gigantic, contract – a deal with OpenAI for the use of computing power over a period of about five years.
This move is expected to catapult Oracle to the forefront of infrastructure providers for generative artificial intelligence.
However, Moody’s analysts, without naming clients, analyse these reports with caution. In their note, they emphasise the “huge potential” inherent in these deals, but at the same time recall the risks that already prompted the agency to change Oracle’s credit rating outlook from stable to negative in July.
Risks hidden in volume
Moody’s main concern is counterparty risk. The agency points out that Oracle’s AI business model is based on huge commitments from a very small number of companies. Such heavy reliance on one or a few key players is risky.
Analysts have likened Oracle’s construction of data centres to one of the world’s largest project finance projects, where the stability of revenue from a single customer is crucial to the success of the entire investment.
Another aspect is the financial health of the company itself. Moody’s forecasts that Oracle’s debt will grow faster than its operating profit (EBITDA) in the near term. This could lead to a high leverage ratio of 4x before profits from new contracts start to exceed costs.
Moreover, analysts expect free cash flow to remain negative for quite some time before the investment starts to pay off.
Oracle is entering the world of big artificial intelligence with tremendous momentum, but its apuesta is fraught with significant financial risk. The company’s current rating of Baa2, at the lower end of the investment grade scale, along with a negative outlook, suggests that financial markets will be watching the giant’s every next step closely.
