Oracle's contract with OpenAI has worried Moody's. What risks do analysts warn about?

Moody's warned of risks for Oracle amid the rapid growth of its AI business and a large-scale contract with OpenAI for $300 billion. At the same time, the agency did not change the software giant's rating. Despite the threat of a growing debt load and negative cash flow, it was this deal that became the driver that lifted the company's shares by 83% since the beginning of the year.

Credit rating agency Moody's has seen a significant counterparty risk for IT giant Oracle amid the rapid growth of its business in the field of infrastructure for artificial intelligence. The agency drew attention to the company's recent $300 billion contract with OpenAI, but did not take any action to change Oracle's rating, Reuters notes.

In early September, sources at The Wall Street Journal reported that OpenAI will acquire 4.5 GW of computing capacity from Oracle as part of a five-year agreement, leveraging an expanding network of AI-focused data centers.

"Counterparty risk is always a key factor in project finance, especially when there is high dependence on a single client," Moody's analysts said in a new survey.

Historically, Oracle's data centers have served three large customers, which the company has not disclosed. With the addition of OpenAI as Oracle's fourth major customer, Moody's warns: the company's debt could grow faster than EBITDA, increasing its debt load to about 4x before earnings begin to catch up with liabilities. Analysts also expect free cash flow to remain negative for an extended period before reaching the break-even point.

The last time Moody's revised Oracle's rating was in July. Then the agency lowered the outlook on the company's credit rating from "stable" to "negative", while confirming the rating Baa2 - the lower boundary of the investment level.

Since the beginning of the year, the company's securities have already grown by 83%, including 36% last week. Then Oracle reported a sharp jump in the volume of signed but not yet executed contracts: the figure reached $455 billion against $138 billion a quarter earlier. This growth reflects strong demand for Oracle's cloud services. At the same time, it became known about a contract with OpenAI, which also boosted Oracle's stock.

Oracle shares were adding 0.5% at the premarket on Sept. 18, although they had closed down 1.7% in previous trading.

According to TipRanks, Oracle stock has a consensus rating of Strong Buy with 24 "buy" recommendations and eight "hold" recommendations. The average target price is $340.75, suggesting a potential upside of 13% from current levels.

Jefferies analysts in a Sept. 14 note called Oracle "an emerging force in the cloud wars," where it competes with giants such as Microsoft, Alphabet and Amazon, Barron's reported. They reiterated a Buy recommendation on the company's shares with a $360 target price.

In its first quarter report, the company said Remaining Performance Obligations (RPO, future delivery obligations) for its AI cloud infrastructure grew 359% year-over-year to $455 billion.

Moreover, the company's CEO Safra Catz hinted that thanks to new multibillion-dollar deals, RPO could soon exceed $1.5 trillion. According to WSJ, it is the OpenAl contract that generates a significant portion of Oracle's new revenue.

This article was AI-translated and verified by a human editor