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Credit rating agencies have grown increasingly cautious on Oracle ORCL as the company's aggressive artificial intelligence buildout strains its balance sheet. S&P Global Ratings downgraded Oracle's long-term issuer credit rating one notch to BBB- from BBB earlier this month, along with a short-term rating cut from A-2 to A-3, while maintaining a stable outlook. The move leaves Oracle just one step above speculative-grade status. Moody's Ratings, meanwhile, holds a negative outlook on the company, signaling that a further downgrade remains possible over the medium term. These agency actions coincided with Oracle's five-year credit default swap spread climbing to roughly 2.03 percentage points, its highest level in nearly 18 years, as bond investors demanded greater compensation and existing Oracle debt sold off amid doubts over whether the AI investments will pay off.
The rating cuts followed Oracle's fourth-quarter and full fiscal 2026 results, released in June, which showed record demand alongside deepening cash strain. Total revenues for the quarter reached $19.2 billion, up 21% year over year, with cloud revenues climbing 47% to $9.9 billion; cloud infrastructure revenues alone surged 93%. Remaining performance obligations, Oracle's forward demand backlog, ended the quarter at $638 billion, up 363% from a year earlier and $85 billion higher sequentially. For the full year, revenues reached $67.4 billion and non-GAAP earnings per share rose 27% to $7.63. Yet free cash flow was negative $23.7 billion for fiscal 2026, as capital spending on data centers outpaced operating cash generation.
To fund this expansion, Oracle raised $43 billion in debt and $5 billion in equity during fiscal 2026 and plans roughly $40 billion more in fiscal 2027, including a previously announced $20 billion equity issuance, while stating it does not intend to issue additional bonds this calendar year. Management points to the backlog as evidence that spending tracks committed contracts, guiding to $90 billion in fiscal 2027 revenues, leaving the pace of backlog conversion as the key variable investors are watching against rising leverage.
Microsoft & Amazon Show Similar AI-Driven Cash Pressure
Unlike Oracle, Microsoft MSFT and Amazon AMZN still hold top-tier investment-grade ratings, though both show comparable strain from AI spending. Microsoft's free cash flow fell to $15.8 billion in its most recent quarter, down from $20.3 billion a year earlier, as capital expenditure rose sharply. Amazon's free cash flow was further squeezed to $1.2 billion as capital spending climbed 77% year over year and long-term debt reached $119.1 billion. Neither Microsoft nor Amazon has faced a rating downgrade so far, but the leverage build-up at both companies shows that AI infrastructure costs are pressuring balance sheets industry-wide, not just at Oracle.
ORCL’s Price Performance, Valuation & Estimates
Shares of Oracle have lost 31.9% in the past six-month period, underperforming the Zacks Computer and Technology sector’s appreciation of 15.8%.
ORCL’s 6-Month Price Performance
Image Source: Zacks Investment Research
From a valuation standpoint, ORCL stock is currently trading at a discount with a trailing 12-month Price/Earnings ratio of 14.44x, which is lower than the Zacks Computer - Software industry average of 19.4x. Oracle carries a Value Score of B.
ORCL’s Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for ORCL’s fiscal 2027 earnings is pegged at $8.03, which suggests 5.24% growth year over year.
Oracle Corporation Price and Consensus
Oracle Corporation price-consensus-chart | Oracle Corporation Quote
ORCL stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This article originally published on Zacks Investment Research (zacks.com).
