Oracle faces negative outlook at S&P as cloud growth strains cash flow

Investing.com -- S&P Global Ratings revised its outlook on Oracle Corp (NYSE:ORCL). to negative from stable on Wednesday, while affirming the company’s ’BBB’ long-term issuer credit rating.

The rating agency cited Oracle’s rapidly expanding cloud infrastructure business, which is driving strong top-line growth but generating weaker free operating cash flow (FOCF) than previously forecasted.

Oracle’s fiscal 2025 capital expenditure more than tripled to $21 billion, representing 37% of revenues compared to 17% two years ago. S&P now forecasts fiscal 2026 capex will reach nearly $27 billion, or 40% of revenues.

The company’s FOCF was only modestly positive in fiscal 2025 and is expected to remain weak at about $1 billion in fiscal 2026, insufficient to support dividends of nearly $6 billion per year and modest share repurchases.

On June 30, Oracle announced multiple large cloud services agreements, including one expected to contribute more than $30 billion in annual revenue starting in fiscal 2028. This contract is believed to be part of the Stargate Project, a $500 billion AI infrastructure investment over four years led by partners including OpenAI, SoftBank (TYO:9984), and Oracle.

These new contracts will likely require Oracle to increase capital spending beyond current forecasts, potentially pushing S&P Global Ratings-adjusted leverage above the 3.5x downgrade trigger. The company’s leverage stood at 3.3x as of May 2025.

Despite these concerns, Oracle reported strong operating results in fiscal 2025, with revenues growing 8.4% year over year to $57.4 billion. Cloud services grew 24% to $24.5 billion. S&P forecasts fiscal 2026 revenues will grow 16% to approximately $67 billion.

The rating agency views Oracle’s cloud strategy favorably for the long term but considers it a near-term credit risk due to the significant capital investments required before revenue generation.

S&P could lower Oracle’s rating if debt to EBITDA remains above 3.5x over the next two years with no clear improvement path. Conversely, the outlook could return to stable if Oracle achieves its growth objectives while moderating capital spending to maintain leverage below 3.5x.

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