BREAKINGVIEWS-Oracle capitalizes on crisis of AI faith

By Jonathan Guilford

NEW YORK, Feb 2 (Reuters Breakingviews) - Oracle ORCL.N is keeping belief in artificial intelligence alive. The cloud computing goliath has embarked on an expensive data-center building spree. Initial euphoria wore off as cost realities settled in. A new $50 billion fundraising plan leans into the mood swing, giving investors a chance to buy a discounted piece of the pot of profit at the end of the rainbow.

The AI arc feels rote at this point. Meta Platforms META.O promises to spend as much as $135 billion this year on chatbot-powering infrastructure. Microsoft MSFT.O splashed out nearly $38 billion last quarter. The power of large-language models is such that even at these heady capital expenditure levels, there's the promise of a chunky return someday.

Oracle muscled its way into the club. Chair Larry Ellison aggressively signed longterm server-farm leases while selling capacity to OpenAI, TikTok, xAI and others. Oracle added $240 billion of market value in a single day last September when it unveiled $455 billion in contracts for its cloud infrastructure business.

The fine print has been painful, however. Oracle is on track to churn through $77 billion of cash between 2026 and 2029 as it adds computing power, according to estimates compiled by Visible Alpha. The company quickly borrowed $18 billion in the bond market, but investors were getting nervous.

The cost of protecting against an Oracle default over five years quintupled to nearly $160,000 annually for every $10 million of insurance in derivatives markets. Credit ratings agency Standard & Poor’s warned about bulging commitments. The stock price is down by nearly half from its September peak.

None of this changes the AI story itself. A massive bottom line boost is anticipated once the spending cycle ends in 2030. As a multiple of estimated profit that year, however, Oracle’s shares have fallen behind fellow hyperscalers.

This opens an opportunity. Pivoting toward issuing equity dilutes earnings per share, but it is so undervalued that Oracle’s potential profit can be bought relatively cheaply. This should help it sell $20 billion of stock and take pressure off the balance sheet.

There are tradeoffs. Oracle’s shares are supported by a nearly $6 billion annual dividend. Those payouts may prove essential to keep equity investors happy, especially since the company probably will have to raise yet more money to stay competitive in the AI arms race.

Any disruption might weaken Oracle's ability to tap equity markets. Fitch Ratings, at least, affirmed the company’s investment-grade status on the back of its latest hybrid approach. Maintaining the optionality will cost dearly, though.

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CONTEXT NEWS

Cloud computing provider Oracle disclosed plans on February 1 to raise as much as $50 billion in 2026 to help fund the building of data centers and infrastructure.

Oracle said it would issue unsecured investment-grade bonds early in 2026, with the company not planning any further bond issuance later in the year. It also aims to issue mandatory convertible preferred shares and has authorized a $20 billion at-the-market equity offering program.

Goldman Sachs is leading Oracle’s unsecured bond offering, while Citigroup will lead the equity programs.