Oracle, the multinational technology giant, has taken out many loans to develop its artificial intelligence capacity. But Oracle investors are not happy with this growing debt load.
Transcription
LEILA FADEL, PRESENTER:
Tech giant Oracle has added a lot of debt lately, which is raising questions from Wall Street investors. Our colleagues Rick Mulvey and Adrian Ma at The Indicator explain how Oracle’s fortunes and the rise of AI connect to the broader economy.
ADRIAN MA, BYLINE: Oracle is one of those companies that you’ve probably heard of but may not deal with directly. It is a multinational technology giant that sells business software and computing power.
RICKY MULVEY, BYLINE: Yes. The vast majority of large companies use their databases and software.
MA: And about a decade ago, credit analysts viewed Oracle bonds as a safe investment.
MATT SHERIDAN: They were a high-margin software company. Now it’s about building a capital-intensive data center? This was a big change.
MA: Matt Sheridan is a senior lecturer in the finance department of…
SHERIDAN: The Ohio State University.
MULVEY: Matt also looked at credit before working as a teacher.
SHERIDAN: The biggest problem with Oracle is that the load has almost doubled in the last two years. They have a total debt of 169 billion.
MA: Oracle entered the AI boom in a weaker financial position than other tech giants.
MULVEY: Larry Ellison is co-founder and CEO of Oracle. He believes that training AI models is a great business opportunity.
MA: So why aren’t Oracle investors happy?
MULVEY: One reason is the enormous size of the debt. It has turned Oracle from a cash-generating company to a money-burning one.
MA: Another is that the path back to profitability may take some time. Building data centers takes a second.
MULVEY: Oracle is very confident in OpenAI. Sam Altman and the people at OpenAI promised Oracle that they would pay around $300 billion over the next five years. Oracle data centers help power ChatGPT.
MA: And OpenAI’s financials come with a lot of open questions, mainly because you probably can’t see them.
MULVEY: And Matt says that if OpenAI’s financials were public, its value would also be based on its actual numbers.
SHERIDAN: So if OpenAI’s revenue really can’t be trusted to grow at parabolic speed, that’s going to hurt Oracle.
MA: Oracle and OpenAI don’t just have a customer-seller relationship. This has further implications for the economy in general.
MULVEY: OpenAI pays Oracle to use its cloud infrastructure and says it will pay much more in the coming years. So Oracle buys chips from Nvidia to further build this cloud. And then Nvidia pours money into OpenAI so that OpenAI can buy compute space from Oracle, which, remember, is buying those chips from Nvidia.
MA: I’m just imagining a circle. And according to credit investors, Oracle is a weak link in this circular economy.
MULVEY: Oracle has already signaled that it might have trouble paying its loans on time. This notice generated some alarming headlines, but Matt says it could actually benefit Oracle. It allows the company to delay payments, although it still has to pay the full amount.
MA: Still, Oracle credit investors are pricing in higher risk. S&P, the big credit rating agency, downgraded Oracle’s credit rating in July. Now Oracle is just above garbage status. Matt says these circular deals and large amounts of debt could create real problems for the economy as a whole.
SHERIDAN: And that worries me that if this is a bubble, it’s going to look more like a Lehman Brothers type event. And they are all becoming very interconnected.
MA: For now, the wheel keeps turning.
MULVEY: Ricky Mulvey.
MA: Adrian Ma, NPR News.
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