However, some investors are expressing concerns as Oracle is heavily financing this expansion with borrowed funds.
The company’s Credit Default Swap (CDS) spread has surged to an all-time high of 212 basis points.
Concurrently, Oracle’s stock price has nearly reached its lowest point in a year. Currently, shares are trading at approximately $116.71, slightly above the 52-week low of $116.01, after experiencing a decline of nearly 52% over the last year.
What is CDS spread?
A Credit Default Swap (CDS) functions like an insurance policy for a company’s debt.
Imagine an investor lends money to Oracle by purchasing its bonds. If the investor becomes concerned that Oracle might struggle to repay the loan, they can purchase a CDS for protection.
The expense of this protection is referred to as the CDS spread.
For instance, if an investor seeks to insure $10 million worth of Oracle bonds, they would need to pay approximately $212,000 annually for coverage against Oracle defaulting on its debt.
When the CDS spread increases, it indicates that investors believe there is a higher likelihood of the company encountering difficulties repaying its obligations.
Which companies have seen their CDS spreads?
As of July 22, five firms—Alphabet (the parent company of Google), Amazon, Meta, Microsoft, and Oracle—have collectively raised around $302 billion from financial markets.
Axios reported that Meta exhibited the highest perceived credit risk among significant tech companies, with a five-year CDS spread of about 0.87 percentage points.
Amazon and Alphabet followed, with spreads around 0.65 percentage points, while Microsoft reported a spread of 0.51 percentage points, and Apple had the lowest at approximately 0.35 percentage points.
AI-related borrowing already crossed estimates
A report by Goldman Sachs revealed that companies worldwide have accumulated about $489 billion in AI-related debts and loans this year alone. This figure significantly exceeds their previous projection of $322 billion for the entire year of 2025, according to Axios.
Japan’s Nikkei recently highlighted that leading AI firms may be carrying around $1.65 trillion in “hidden debt.”
Alphabet also raised eyebrows among some investors after reporting its first quarter of negative free cash flow since going public in 2004.
Will AI investments pay off?
Technology firms are pouring billions into AI, believing it will emerge as a critical source of future profits. However, the emergence of cheaper and more effective Chinese AI models has led investors to question whether these substantial investments will yield sufficient returns.
