Oracle is currently navigating a challenging financial landscape as it transitions from a traditional software provider to a major player in AI cloud computing. The company is spending heavily, with plans to burn tens of billions more in cash over the coming years to lease advanced computer chips crucial for powering AI applications like OpenAI’s ChatGPT.
Oracle’s bonds, rated just two notches above speculative-grade, now offer yields higher than most investment-grade peers in the tech sector. Jordan Chalfin, a senior analyst at CreditSights, estimates that Oracle might issue an additional $65 billion in bonds in the next three years to fund its transformation efforts.
Despite the potential rise in its cost of debt, Oracle’s interest expenses will remain small compared to its capital expenditures. Chalfin emphasizes the importance for Oracle to maintain its investment-grade rating due to the limited financing options available to companies with lower credit ratings.
Recently, there has been increased trading activity in Oracle’s credit-default swaps, financial instruments that gained notoriety during the 2008-09 crisis. Although bond investors have not reacted with alarm, this heightened attention has contributed to a 24% decline in Oracle’s share price this month.
Investors should consider that Oracle’s strategic shift involves substantial financial risks but also positions the company within a high-growth sector. The company’s ability to manage its debt and maintain creditworthiness will be critical for sustaining investor confidence moving forward.
In summary, while Oracle’s ambitious cloud and AI expansion requires extensive funding and has impacted its stock performance, the company’s solid market presence and capital management strategy remain key factors for investors evaluating its future prospects.
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