Would you believe me if I told you that debt investors will not change their viewpoint of a company who over the next few years is expected to increase revenue by 240%, debt by 410%, and barely generate a positive cash profit? Would you feel more confident if I told you this company is changing its business by heavily investing in technology that has not yet produced an adequate return on investment? Me neither.
Welcome to the current state of the AI thesis and the ratings decision provided by S&P Global Ratings (S&P) on Oracle.
But first, a little background.
The Big Three rating agencies (e.g., S&P, Moody’s Ratings, and Fitch Ratings) assign credit ratings to organizations. Investors use these ratings to set firms’ borrowing costs. The agencies utilize a similar rating scale, which highlights the likelihood of debt investors not earning back the money they lend to borrowers. Low-risk firms receive an investment-grade rating (e.g., AAA, AA, A, and BBB), while high-risk firms receive a speculative-grade rating (e.g., BB, B, CCC, CC, C, and D).
Put simply, the worse an organization’s rating becomes, the higher the firm’s borrowing costs. After all, debt investors can only earn their principle back plus interest. There is no additional upside. This sharpens their focus on return of capital rather than return on capital.
Back to Oracle.
After examining S&P’s July 9, 2026, decision to downgrade Oracle’s credit rating to BBB- (the last investment-grade rating possible), I had more questions than answers. As I previously mentioned, S&P notes that revenue from fiscal years 2022 thru 2028 should increase 239%. Similarly, both debt and cash flow should increase 400 – 450%. Unfortunately, the actual cash profit Oracle is expected to generate after it invests in AI (e.g., free cash flow) declines 32% and is negative from 2025 through 2027.
If that wasn’t enough…
S&P noted during its July 13, 2026 “Oracle Downgrade Explained” call that Oracle and SpaceX are “both no doubt outliers for investment-grade”. S&P further stated that while Oracle’s credit metrics are not investment-grade today, “what keeps it investment-grade is that we think that as the AI business scales Oracle should be harvesting cash flow at years three, four, five of their contracts. So we are still giving the company time to prove their business case and over that timeline we will, we will have more data points, more confidence about Orache’s AI business prospects”.
To be clear, I am not opposed to credit rating agencies giving companies time to prove their business models. However, the numbers must also make sense.
Miraculously, from 2022 through 2028, Oracle’s interest costs are forecast to rise 271% while debt increases 412%. This can only occur if interest rates charged on debt decline substantially. This should not happen if Oracle’s financial condition worsens. The credit default swap (CDS) market agrees as spreads on five-year CDS contracts were recently greater than 200 basis points, a level last reached during the 2008 Global Financial Crisis.
It would be equally helpful if S&P was confident in their Oracle forecasts, particularly post-2027, but this is not the case. “Oracle is now a ‘show me’ story with limited visibility and lots of question marks out there,” S&P stated.
Part of this uncertainty stems from Oracle changing its business model, as well as its relationship with OpenAI. S&P describes this new business model a capital-intensive, “no moat business.” In other words, it has no competitive advantage. Why then does S&P expect Oracle to drive considerable revenue and accounting profit growth through 2028, while warning of an “uncertain path to profitability?”
Another contributor is the difficulty in forecasting the investment required for Oracle to achieve its AI ambitions.
Specifically, after discussions with Oracle, S&P had to increase its 2027 capital expenditure guidance almost 60% from $60 billion to $95 billion. S&P notes its frustration by stating it is routinely “playing catch up” regarding ever-increasing capital expenditure forecasts. Who isn’t?
S&P’s current credit rating and stable outlook are predicated on the Oracle’s focus on maintaining an investment-grade rating, coupled with the potential for future equity issuances to stabilize its balance sheet. S&P notes that the rating could be pressured if Oracle fails to maintain or lower its current level of debt-to-EBITDA OR fails to generate positive free cash flow in 2028. Ironically, between now and then, 2028 is the only year Oracle is expected to generate positive free cash flow. As we have already discussed, much must go exactly right for this to occur.
Given the current level of uncertainty regarding the ability of AI companies to generate meaningful ROI, S&P’s limited confidence to forecast Oracle’s financial performance past 2027, and Oracle’s weakening financial performance and uncertain path to profitability, one must wonder how Oracle deserves an investment-grade credit rating. I know I am.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
The post S&P kept Oracle investment grade. Its own numbers don’t support that call. appeared first on Fortune.
