Oracle Wants Protection If Its AI Data Center Is Delayed. Here's What That Changes for Investors.

Bloomberg reported that Oracle (NYSE:ORCL) has sent a legal notice to the developer of its $X billion "Project Jupiter" AI data center campus scheduled to come online in 2028. It cites "force majeure," a contract provision that offers protection if events outside of a company's control disrupt a deal -- in this case, the delay of a critical natural gas pipeline.

Oracle is hoping to delay rent payments if the data center is not delivered by the deadline. The developer, a subsidiary of Blue Owl Capital, must first agree that a qualifying event occurred, and Oracle would still be on the hook for certain fees and other payments.

Despite the letter, Oracle was adamant that the project is not delayed, telling CNBC that "Project Jupiter remains on our planned schedule," and that "we are fully committed to New Mexico and confident in our path forward."

Why investors are worried about Project Jupiter

While Oracle insists the project is on schedule, investors are growing increasingly worried. The $18 billion in project financing for Poject Jupitor have fallen into "stressed" territory. That means the banks that loaned the money are willing to let them go for considerably less than they are worth in name, fearing the loans may go bad. The Financial Times reported that as of last Friday, they had fallen to around 89 to 91 cents on the dollar.

That's in part due to the stiff local opposition the 1,400-acre campus is facing. Residents are concerned with the environmental impact as well as noise pollution -- a common theme from projects around the country. A recent poll by the Albuquerque Journal found 65% opposed to their construction in the state.

The company has had trouble with regulators as well. The plan to bring natural gas to the site was blocked by the state's land office, so was a revised plan.

Oracle's growth comes with a heavy debt load

That's a lot of uncertainty around a key project, and it comes at a bad time for Oracle.

Yes, the company's growth has been incredible. Sales in Oracle Cloud Infrastructure (OCI), the unit that builds and leases AI data centers, jumped 121% to $7.4 billion last quarter. Its remaining performance obligations (RPO) -- revenue it's under contract for but hasn't delivered yet -- reached an incredible $664 billion.

Delivering on that RPO is another question. It takes a whole lot of cash to fund these massive projects and the company has seen its free cash flow (FCF), the money left over after running the business and paying for things like Project Jupitor, ran negative -- a $5.4 billion shortfall last quarter alone.

Oracle has turned to debt (as well as dilutive stock sales) to fund the gap. It now has $125 billion in long-term debt on the books, and that excludes project-specific financing like the $18 billion in Jupiter loans as well as $288 billion in data center lease commitments that haven't started yet.

I've not been a fan of Oracle stock for a while, so the latest reveal of the force majeure notice doesn't necessarily change my position, but it does further underscore the risk Oracle has taken on in its bet-the-farm approach to the AI data center boom.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.