Oracle rating downgraded by S&P, now stands one notch above junk; reason is Sam Altman

S&P Global Ratings has cut its long-term issuer credit rating (ICR) on Oracle Corporation to ‘BBB-’ from ‘BBB’, placing the tech giant just above speculative-grade, or "junk," status. The downgrade comes amid concerns over Oracle's expanding artificial intelligence (AI) infrastructure business, particularly its relationship with Sam Altman-led OpenAI. Despite maintaining a stable outlook, S&P highlighted the growing financial exposure tied to OpenAI, which it estimates accounts for approximately half of Oracle’s $638 billion in remaining performance obligation (RPO). If OpenAI defaults on payments, Oracle could face significant liabilities related to its data center leases. The downgrade follows a series of assessments by S&P throughout 2025, beginning with a negative outlook issued in July of that year. At the time, the agency cited the speed of Oracle’s AI infrastructure expansion and the possible financial consequences of such a move. Now, S&P acknowledges that it had underestimated the scale of the investments necessary to support Oracle’s AI operations and how these efforts might affect the company’s broader creditworthiness. According to S&P, Oracle’s cloud infrastructure segment, which contributed 27% of its revenue in fiscal 2026—is projected to account for nearly 60% of total revenue by fiscal 2028. While this represents a major shift in Oracle’s business mix, the rating agency views the AI sector as significantly more volatile compared to Oracle’s traditional enterprise software and database divisions. Those segments have historically delivered consistent, recurring revenue streams and benefited from loyal enterprise clients. By contrast, the AI infrastructure business demands large initial capital expenditures, with returns typically realized over extended periods through multi-year contracts. S&P noted that Oracle’s AI operations rely heavily on upfront investments and long-term commitments to data centers, areas where the agency admits it previously miscalculated the financial burden. Additionally, rising costs for components used in AI computing could further strain the economic viability of Oracle’s AI business model. The agency emphasized that the fast-paced expansion of AI capacity across the industry poses a growing risk, especially if key players fail to secure outside funding or discontinue subsidies for their users. Enterprise clients may also reconsider their AI spending if they find returns insufficient, according to S&P. Recent developments, such as SpaceX leasing its compute resources to Anthropic and Alphabet, along with the possibility of Meta doing the same, suggest increasing competition in the space. These trends could influence future re-leasing agreements when existing contracts expire. During an industry slowdown, S&P anticipates Oracle would fare worse than other major cloud providers due to its heavier dependence on external customers rather than internal workloads. Competitors, meanwhile, tend to possess greater financial resilience, allowing them to outspend Oracle during downturns. S&P warned that it could further lower Oracle’s rating if certain conditions materialize. These include expectations that Oracle’s debt levels exceed 4.5 times earnings, doubts about its ability to produce positive free cash flow (FOCF) by fiscal 2029, or a negative assessment of Oracle’s AI strategy or the AI industry as a whole. An upgrade, though considered unlikely in the near term, could occur if Oracle meets its growth targets while consistently generating positive FOCF. In such a case, S&P expects Oracle’s adjusted leverage ratio to stabilize around the mid-3x range.