Oracle, a veteran American technology company, disclosed last week that it signed artificial intelligence (AI) contracts worth more than US$300 billion in the first quarter of this year. This news not only caused an epic surge in Oracle's own stock price, but also caused collective excitement among AI concept stocks in the US stock market.
However, when the enthusiasm subsided, the market began to pay attention to the risks behind Oracle's huge orders. In fact, shortly after news of the huge order broke, multiple analysts raised multiple risks in reports, including that most of the company's future growth will come from a single customer: OpenAI.
The latest warning comes from Moody's, one of the three major international credit rating agencies. The agency pointed out that Oracle's recently signed $300 billion AI contract has multiple potential risks and maintained its rating on the software giant unchanged.
Oracle announced its first fiscal quarter results after the U.S. stock market closed last Tuesday. During the earnings call, Oracle disclosed that its remaining performance obligations (RPO) had soared to US$455 billion, a year-on-year increase of 359%, of which an additional US$317 billion was added in the first fiscal quarter alone. Oracle CEO Safra Catz said the company signed four large contracts with three different customers in the last quarter and expected more similar deals in the coming months, bringing the backlog to more than $500 billion.
Subsequently, it was reported that OpenAI had signed a contract with Oracle to purchase computing power services worth US$300 billion from the latter within about five years. The contract will be implemented in 2027, with an average annual expenditure of approximately US$60 billion. This means that the OpenAI deal accounted for nearly 95% of Oracle's increased future contract revenue in the first fiscal quarter.
Moody's analysts noted on Wednesday that the contracts highlighted the "enormous potential" of Oracle's AI infrastructure business. But they also drew attention to several risks raised by Moody's in its rating action in July, when the agency downgraded Oracle's credit rating outlook to negative from stable.
One of the main risks identified by Moody's is "counterparty risk," or the risk Oracle faces in relying on huge commitments from a handful of AI companies to fund its business model.
"Counterparty risk is always a key consideration in any type of project financing, especially where there is a high degree of reliance on a single counterparty for revenue," Moody's analysts wrote on Wednesday.
"In our view, Oracle's data center construction is one of the largest, if not the largest, project financing in the world," they added.
Analysts further noted that Oracle's debt will grow faster than its earnings before interest, taxes, depreciation, and amortization (EBITDA), which could cause its leverage to reach as high as 4x before EBITDA starts to exceed debt.
"(Oracle's) free cash flow is likely to be negative for an extended period before reaching breakeven," the analysts wrote.
Moody's has an issuer rating of Baa2 for Oracle, which is at the low end of investment-grade credit ratings.
On Wednesday, Oracle's stock price fell 1.71% to US$301.41. It has fallen more than 10% from the historical high hit last Wednesday, but it has still risen by more than 80% this year.
