Oracle Corporation (NYSE: ORCL) saw its stock rise nearly 2% in premarket trading on Friday, building on Thursday's 2.65% gain to close at $144.22. The positive momentum comes despite S&P Global Ratings downgrading the company's credit rating to BBB-, just one notch above junk status. While equity investors continued buying, bond investors demanded higher yields, reflecting growing concerns about Oracle's financial strategy.
Credit Downgrade and Equity Dilution
The downgrade by S&P analysts Andrew Chang and Christian Frank highlighted Oracle's aggressive push into artificial intelligence infrastructure, which they said is weakening the company's business risk profile. S&P admitted it underestimated Oracle's capital needs and placed a stable outlook on the rating, but warned of further downgrades if adjusted leverage remains above 4.5 times earnings. Oracle's $20 billion at-the-market (ATM) equity offering, if fully executed at Thursday's closing price, would add approximately 138.7 million new shares, increasing the share count by 4.8% from June levels and diluting existing holders by about 4.6%.
Market Performance and Bond Spreads
Oracle's stock outperformed the broader market on Thursday, beating the S&P 500 by 1.84 percentage points and the Nasdaq Composite by 1.35 points. However, the company's 5.7% bond due in 2036 saw its spread over Treasuries widen by 9 basis points to 184 bps, indicating rising credit risk. Despite Thursday's gain adding about $10.7 billion to Oracle's market capitalization, shares remain 3.3% below their intraday high of $149.07. The company goes ex-dividend on Friday for its $0.50 quarterly payout, which will mechanically reduce the stock by about 0.35%.
AI Infrastructure Spending and Backlog
Oracle's argument for accepting dilution rests on its robust growth in cloud infrastructure, with sales surging 93% in the May quarter and 77% for fiscal 2026. The company's remaining performance obligations (RPO) stand at $638 billion, representing contracted but not yet recognized revenue. CEO Clay Magouyrk noted that first-quarter capacity delivery is approaching one gigawatt, underscoring strong demand. However, free cash flow remains negative at $23.7 billion for fiscal 2026, with capital spending of $55.66 billion. Oracle projects spending could reach $95 billion in fiscal 2027, with $20 billion to $25 billion expected to be reimbursed by customers, leaving Oracle to fund about $70 billion—78% of its projected $90 billion revenue.
Competitive Landscape and Regulatory Scrutiny
Oracle faces intense competition from cloud rivals with significantly higher credit ratings: Microsoft (NASDAQ: MSFT) holds an AAA rating from S&P, Alphabet (NASDAQ: GOOGL) is rated AA+, and Amazon (NASDAQ: AMZN) has AA—all seven to nine notches above Oracle. Additionally, the UK has designated all four companies as critical suppliers to its financial sector, effective July 13, which increases Oracle's profile but also imposes new resilience and incident-reporting requirements.
Investor Sentiment and Risks
Bullish investors are betting that customer prepayments, timely data center launches, and conversion of the massive backlog into revenue will offset margin pressure. However, the timing of the expected $20 billion to $25 billion in customer repayments remains uncertain. Delays could force Oracle to use more of its own cash, and a weaker stock price would require selling more shares to raise the same amount. A further downgrade below investment grade could also increase borrowing costs. As eMarketer analyst Jacob Bourne noted, "The demand is real, but the funding question is getting tougher."
