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Oracle's 8% Bond Yields Are an Oracle Problem, Not an AI Problem

Source The Motley Fool

Key Points

Oracle's rising bond yields have raised concerns about how the AI build-out will be financed moving forward.
The main hyperscalers make more profits in one quarter than Oracle nets over multiple years.
Consumer demand remains high for AI products and services, including for Meta Platforms' new Muse agentic AI, which is growing faster than ChatGPT did in its early days.
10 stocks we like better than Oracle ›

Last week, tech giant Oracle (NYSE: ORCL) made news by invoking "force majeure" in a bid to delay payment on the Project Jupiter data center campus it is developing.

The financial world's response was swift. Shortly after that news broke, the tech giant's bonds traded at yields above 8%. Those bonds mature in 2056, highlighting concerns about how the AI build-out will be financed over the long term.

Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »

This news weighed on AI stocks broadly, but it shouldn't have. Oracle has asserted that its 2.45-gigawatt New Mexico data center will be completed on time, and that its financial obstacles do not reflect the entire AI industry.

Image source: Getty Images.

Other hyperscalers are doing just fine

Other hyperscalers like Microsoft, Alphabet, Amazon, and Meta Platforms are going full steam ahead with their AI build-outs. Meta Platforms' quarterly profits are in line with Oracle's annual profits, while Oracle would need several years of profits to match the net income of any of the other three hyperscalers in a single quarter.

Oracle is a tech giant, but it's still relatively small compared with the titans of the industry. Access to capital is not a problem for those hyperscalers. Microsoft, for example, has said that its AI capital expenditures in its fiscal 2027 will be entirely supported by free cash flow.

Alphabet's bonds that mature in 2060 now have yields above 6%. It's normal for investors to earn higher yields on corporate bonds with maturity dates that are further into the future.

Furthermore, it's not like Oracle is struggling. It produced $4.7 billion in net income in its most recently reported quarter (fiscal 2027 Q1), representing more than 60% year-over-year growth. Its interest expenses amounted to 8% of revenue in Oracle's fiscal 2027 first quarter, compared to 6% of revenue in the same quarter last year. That was an increase, but it doesn't warrant panic.

AI demand is still surging

Over its first 12 days of availability, Meta Platforms' Muse was downloaded at a faster rate than ChatGPT was over its comparable period. That signals that demand remains hot for AI models. If people continue to use AI-powered products and services, companies will continue to buy AI chips and build data centers.

AI models are changing the way people obtain information, similarly to how Google search changed the internet. The chipmakers are still reporting excellent revenue growth rates, inking multiyear sales agreements, and building vast order backlogs that amplify the industry's current supply issues.

Not every chipmaker, cloud platform, or software company will win in the AI build-out. Some of today's leaders will be left behind. Oracle still has a large market share and may complete its big data center on time. However, if Oracle needs to slow down due to financing issues, many other companies will eagerly pick up the slack. That's why Oracle's 8% bond yield shouldn't worry AI investors.

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