Oracle's AI Expansion Intensifies Debt and Bubble Risks Amid High Valuation

What happened

Oracle is aggressively building out AI data centers, including a major multi-year deal with OpenAI, to capitalize on growing demand for cloud infrastructure. The company boasts strong multi-year revenue visibility with remaining performance obligations of $455.3 billion, but its stock trades at a premium with a P/E of 51.23. This expansion is heavily funded by debt, increasing net debt to EBITDA to 3.9x and raising concerns about financial leverage. Power availability constraints and intense competition from larger cloud providers could delay or inflate costs, hampering growth prospects. If AI sentiment shifts or OpenAI struggles, Oracle's concentrated bet could expose it to significant downside.

Implication

Oracle's aggressive AI infrastructure spending may compress near-term free cash flow and margins, even as it aims for long-term cloud growth. The elevated debt load, with net debt/EBITDA at 3.9x, heightens financial risk, particularly if interest costs rise or revenue growth falters. Dependence on key AI partners like OpenAI introduces client concentration risks, amplifying vulnerability to any AI market downturn. Competitive pressures and power constraints could erode returns on capital expenditures, affecting profitability and valuation. Investors must watch for deteriorating RPO conversion, margin trends, and AI demand signals to reassess the HOLD rating in light of these intensified risks.

Thesis delta

The DeepValue report already flagged risks from high capex and competition, but the news article underscores Oracle's heightened exposure to AI bubble fears and debt accumulation. This reinforces the existing caution, suggesting downside risks are more acute, though the core HOLD thesis of visibility versus risk remains unchanged.