AI Debt Looms Large, Morgan Stanley Lowers Oracle Price Target

Oracle's massive $300 billion computing power agreement with OpenAI is testing Wall Street's tolerance for the U.S. data center debt craze. According to the Wall Street Journal, several banks, including JPMorgan Chase, have been striving for months to disperse the risks associated with billions of dollars in loans—loans that are used to build data centers in Texas and Wisconsin exclusively for Oracle's lease. Many financial institutions that would typically purchase such loans face internal limits on their exposure to a single counterparty risk, and the scale of this debt is so large that it nearly reaches this limit on Oracle-related transactions. Consequently, the balance sheets of banks are overburdened, directly restricting the financing prospects for future projects related to Oracle and OpenAI. Lenders' refusal to fund the expansion project of the data center in Abilene, Texas, with Oracle as the tenant forced the developer to eventually lease the center to Microsoft instead. The financing challenges faced by Oracle reveal the deep risks of the multi-trillion-dollar data center construction boom: the impediment of capital acquisition, along with electricity grid strain and public opposition, constitute a triple constraint.

Debt Overhang, Institutions Lower Target Prices

After Oracle announced that it would raise the necessary funds by issuing about $50 billion worth of stocks and bonds by 2026, the confidence of lending institutions in related projects has rebounded. Oracle also claimed on the X platform last week that each of its data centers developed for OpenAI is progressing as planned. However, calculations by Morgan Stanley credit analysts showed that even after completing the aforementioned financing, Oracle's additional cash needs from 2027 to the first half of 2028 would still exceed $100 billion. "We have long pondered how Oracle's substantial financing needs will test the depth of different fixed-income markets," Morgan Stanley analysts wrote in February. Following the current path, Oracle's adjusted total debt is expected to peak near $380 billion by the end of FY28, with a leverage ratio of about 5 times, hovering on the edge of Moody's credit rating warning line, with a risk of downgrade. This week, Morgan Stanley therefore slightly lowered its target price for Oracle from $213 to $207, maintaining a neutral rating, and the stock price fell by 5.9% that day. This is the second time the bank has lowered the target price this year. The stock price has fallen by more than 45% from Oracle's 52-week high last September.

Impressive Growth, Profits Under Pressure

Any slowdown in the construction and completion speed of data centers will directly hinder the expansion of computing power urgently needed by AI companies. Some top AI companies are nearing the limit of their service capabilities, with the demand for computing resources continuously exceeding supply. Oracle's financial reports, on the other hand, show a subtle situation of growth and profit divergence. In the 3Q26 fiscal quarter, Oracle's cloud infrastructure revenue grew by 84% year-on-year, and its multi-cloud database business surged by 531%; but at the same time, the gross margin plummeted by 590 basis points year-on-year. What's more noteworthy is that while Oracle raised its FY27 revenue guidance by $5 billion, it never correspondingly raised its EPS guidance—it implies to the market that revenue growth does not necessarily translate into profit improvement. Morgan Stanley forecasts that the composite gross margin for FY28 will further drop to 32.8%, and free cash flow will continue to be negative until FY28, with the deepest deficit of about $64 billion. Oracle's 5-year credit default swap (CDS) spreads have almost quadrupled from the end of September last year to the end of March this year, and in January, bondholders even filed a class action lawsuit on the grounds of "inadequate disclosure of financing risks."