Debt Is Fueling Next Wave of AI Boom --- For aspiring AI players like Oracle, much rides on leverage and hope

“In the initial years of the artificial-intelligence boom, comparisons to the dot-com bubble didn't make much sense. Three years in, growing levels of debt are making them ring a little truer.

 

Early on, wealthy technology companies were opening their wallets to out-joust each other for leadership in artificial intelligence. They were spending cash generated largely from advertising and cloud-computing businesses. There was no debt-fueled splurge on computing and networking infrastructure like the one that inflated the bubble 2 1/2 decades ago.

 

While big tech companies are still at AI's forefront and are in solid financial shape, a crop of more highly leveraged companies is ushering in an era that could change the complexion of the boom.

 

A few smaller companies -- most prominently CoreWeave -- have been relying on creative financing to vault themselves to the AI forefront for a while. More recently, though, the ambitions of companies such as OpenAI are poised to take leverage and mega contracts to a whole new level. OpenAI is laying the groundwork for a network of data centers that will cost at least $1 trillion over the next few years. As part of its push, the company signed a $300 billion five-year contract this month under which Oracle is to set up AI computing infrastructure and lease it to OpenAI.

 

To make good on its end of the contract, Oracle has to spend on that infrastructure before it gets paid in full by OpenAI -- which means a lot of borrowing. Analysts at KeyBanc Capital Markets estimated in a recent note that Oracle would have to borrow $25 billion a year over the next four years.

 

And Oracle is highly leveraged. The company had long-term debt of about $82 billion at the end of August, and its debt-to-equity ratio was about 450%. By contrast, Google parent Alphabet's ratio was 11.5% in its latest quarter, and Microsoft's was about 33%.

 

Oracle and other less-well-heeled AI aspirants such as CoreWeave have few options other than to borrow if they want to play in the big leagues. Nebius Group, another Nasdaq-listed AI cloud company like CoreWeave, reached a $19.4 billion deal in September to supply Microsoft with AI computing services and said it would fund the required capital spending through a combination of its cash flow and debt secured against the contract.

 

Investors so far haven't been too concerned: Oracle's shares shot up after the company revealed a huge expansion of projected revenue owing to its OpenAI deal, even though it will burn through cash for years to fund it. CoreWeave's shares have more than tripled since the company listed in March, while Nebius rose nearly 50% after news of its Microsoft deal.

 

But there is reason for skepticism about these companies' ability to fulfill their contracts and repay their debts.

 

Numerous recent studies found AI isn't gaining traction as quickly as its backers suggest. Only 3% of consumers are paying for it, according to one study. Projections of spending on AI data centers reaching trillions of dollars a year within the next few years seem highly optimistic.

 

Despite the hype around the company, OpenAI's position looks tenuous. It would need to grow to more than $300 billion of annual revenue in 2030 to justify the spending envisioned in the Oracle contract, D.A. Davidson analyst Gil Luria estimates -- a big rise from the company's current run rate of about $12 billion. OpenAI has backing from SoftBank and Nvidia, which is pledging to invest as much as $100 billion as the build-out proceeds. That is big, but far from sufficient.

 

"A vast majority of Oracle's data center capacity is now promised to one customer, OpenAI, who itself does not have the capital to afford its many obligations," Luria said.

 

Oracle might be able to reduce its risk by proceeding with spending only as it recognizes revenue from OpenAI. But Moody's cited "significant" risks in a note this month, pointing to the enormous cost of buying equipment and securing land and electricity. "Whether these will be financed through traditional debt, leases or highly engineered financing vehicles, the overall growth in balance sheet obligations will also be extremely large," it said.

 

Moody's in July gave Oracle's credit rating a negative outlook.

 

There is a decent chance that it all works out. Oracle might manage its contracts and debt adeptly, as it has done in the past. CoreWeave, Nebius and other players might also usher in a wave of financial innovation that spurs AI's growth.

 

But it is at least equally likely that many of today's massive contracts get postponed or renegotiated because end demand for AI services doesn't grow in line with the infrastructure build-out. Contracts could be transferred, too, lawyers say: If OpenAI falters, Oracle could lease its infrastructure to another more-stable company, assuming the deal allows for that.

 

Such a reckoning wouldn't necessarily be a death knell for Oracle and its leveraged peers. But it would be a formidable test for an emerging financial model for AI -- one that looks bubblier by the day.” [1]

 

1. Debt Is Fueling Next Wave of AI Boom --- For aspiring AI players like Oracle, much rides on leverage and hope. Fitch, Asa.  Wall Street Journal, Eastern edition; New York, N.Y.. 30 Sep 2025: B10.