Oracle's debt dilemma

Another day, another tech sell-off—this time starring Oracle.

The stock has plunged over 30% since September 10, its best trading session since 1992. That day, shares soared 36% thanks to growing ties with OpenAI and lofty revenue forecasts. But what once fueled its rally has become its biggest risk.

Investors are now worried about Oracle’s deep reliance on its OpenAI partnership: a $300 billion, five-year commitment to a company that still isn’t profitable and faces $1.4 trillion in funding needs. Among major cloud providers, Oracle is also expected to generate the lowest free cash flow, forcing it to turn to debt for expansion.

Oracle sold $18 billion of bonds in September and is now planning to raise another $38 billion to fund data center build-outs and GPU purchases from Nvidia and AMD. The company is essentially fueling its AI growth endeavors with debt, and the market is worried it’s in over its head: the price of Oracle’s bonds have sunk while their yields have popped over the last two weeks as investors fret over the company’s ability to live up to sky-high expectations.

Cash isn’t flowing like it once was

Oracle’s not alone. Across tech, cash flow can’t keep up with AI ambition: Analysts estimate that AI infrastructure could require nearly $3 trillion in spending by 2028, but tech giants are on track to produce only about half that amount in cash. The gap is forcing companies to get creative, turning to special purpose vehicles (SPVs) to keep debt off their balance sheets and shield individual projects from risk. But this workaround comes at a cost: SPVs are complex, opaque, and less liquid, leaving investors uneasy about how much exposure these firms really carry.

We’re already seeing it play out. Meta set up SPV Beignet Investor LLC to raise $30 billion, largely through borrowed funds, to build a data center in Louisiana. Meanwhile, Elon Musk’s xAI is reportedly pursuing about $20 billion via a similar vehicle that would purchase Nvidia chips and then lease them back to the venture.

Others are sticking to more conventional routes. Alphabet raised $15 billion in the US bond market this week, with plans to secure another $7 billion through European debt offerings. Meta also leaned on traditional corporate bonds earlier this year, securing about $30 billion in October.

Investors still can’t quit tech

All this borrowed money comes with strings attached. As Michael Green of Simplify Asset Management told MarketWatch, “By using borrowed money instead of cash, you’re magnifying the outcome when you win.” But he also noted that the same leverage amplifies the downside when trades go south.

And the scale is only growing. A Morgan Stanley strategist estimates that $800 billion, or nearly a third of the total AI capital spending expected over the next three years, will be financed through some form of private credit. That means a significant portion of the industry’s foundation rests on nontraditional, opaque, and high-yield borrowing.

The broader market mirrored those concerns yesterday, with the Nasdaq tumbling 2.29% in a tech selloff. But for now, at least, Wall Street still has an appetite for all things tech: Investors bought the dip today, helping the Nasdaq log its biggest single-day turnaround since April.—SY