Would you believe me if I told you that debt investors are not going to change their view of a company that is expected to grow revenue by 240%, debt by 410%, and barely generate positive cash earnings over the next few years? Would you be more confident if I told you that this company is transforming its business by investing heavily in technologies that have not yet provided a reasonable return on investment? Me neither.
Welcome to the current status of the AI thesis and the rating decision from S&P Global Ratings (S&P) on oracle.
But first, a little background.
The three major rating agencies (e.g. S&P, Moody’s Ratings and Fitch Ratings) assign credit ratings to companies. Investors use these ratings to determine companies’ borrowing costs. The agencies use a similar rating scale that highlights the likelihood that debt investors will not recoup the money they lend to borrowers. Low-risk companies receive an investment-grade rating (e.g., AAA, AA, A, and BBB), while high-risk companies receive a speculative-grade rating (e.g., BB, B, CCC, CC, C, and D).
To put it simply: the worse an organization’s rating becomes, the higher the company’s borrowing costs are. After all, debt investors can only get their capital back plus interest. There is no additional benefit. This sharpens the focus on returns from Capital instead of return To Capital city.
Back to Oracle.
After researching S&P’s July 9, 2026 decision to downgrade Oracle’s credit rating to BBB- (the ultimate investment grade rating), I had more questions than answers. As I mentioned earlier, S&P expects revenue to grow 239% in fiscal years 2022 to 2028. Likewise, both debt and cash flow should increase by 400-450%. Unfortunately, Oracle’s actual cash profit after investments in AI (e.g. free cash flow) is expected to decline by 32% and be negative from 2025 to 2027.
If that wasn’t enough…
S&P noted in its July 13, 2026 “Oracle Downgrade Explained” call that Oracle and SpaceX are “undoubted investment-grade outliers.” S&P further explained that while Oracle’s credit metrics are not at investment grade levels today, “what keeps them at investment grade levels is that we believe that as Oracle scales its AI business, it should be harvesting cash flow in the third, fourth and fifth years of its contracts. So we are still giving the company time to prove its business case, and over that period we will have more data points and more confidence in Orache’s AI business prospects.” have.”
To be clear: I am not against rating agencies giving companies time to prove their business models. However, the numbers also have to make sense.
Miraculously, Oracle’s interest costs are expected to rise 271% from 2022 to 2028, while debt will rise 412%. This can only happen if interest rates on debt fall significantly. This should not happen if Oracle’s financial condition deteriorates. The credit default swaps (CDS) market agrees, with spreads for five-year CDS contracts recently exceeding 200 basis points, a level last seen during the 2008 global financial crisis.
It would also be helpful if S&P were confident in its Oracle forecasts, particularly beyond 2027, but that is not the case. “Oracle is now a ‘show me’ story with limited visibility and a lot of question marks out there,” S&P said.
Part of this uncertainty is due to Oracle changing its business model as well as its relationship with OpenAI. S&P describes this new business model as a capital-intensive “no-moat business.” In other words, it has no competitive advantage. Why then does S&P expect Oracle to achieve significant revenue and accounting profit growth by 2028, but at the same time warn of an “uncertain path to profitability”?
Another factor is the difficulty of predicting the investments Oracle will need to realize its AI ambitions.
Specifically, after discussions with Oracle, S&P had to increase its investment forecast for 2027 by almost 60% from $60 billion to $95 billion. S&P expresses frustration by saying it regularly “plays catch-up” amid ever-increasing investment forecasts. Who isn’t?
S&P’s current credit rating and stable outlook are based on Oracle’s focus on maintaining an investment grade rating, coupled with the potential for future equity offerings to stabilize its balance sheet. S&P notes that the rating could come under pressure if Oracle fails to maintain or reduce its current debt-to-EBITDA ratio OR fails to generate positive free cash flow in 2028. Ironically, until then, 2028 is the only year in which Oracle is expected to generate positive free cash flow. As we’ve discussed, a lot of things have to go just right for this to happen.
Given the current uncertainty surrounding AI companies’ ability to generate meaningful ROI, S&P’s limited confidence in forecasting Oracle’s financial performance beyond 2027, and Oracle’s weakening financial performance and uncertain path to profitability, one has to ask how Oracle deserves an investment grade credit rating. I know it’s me.
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