The Stock Market Is “Petrified of Oracle’s Balance Sheet” as Microsoft Walks Away
Key Takeaways
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Microsoft is winding down a deal to rent AI computing power from Oracle, days after Oracle canceled an estimated $7 billion chip-leasing deal with Tencent.
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The Microsoft contract itself looks small, but losing it leaves Oracle’s backlog leaning even harder on OpenAI, which S&P says accounts for about half of it.
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Oracle’s free cash flow was negative $23.7 billion in fiscal 2026, its total debt reached $167 billion, and it sold another $20 billion of stock and notes on Nov. 2.
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The market’s fear looks justified until Oracle’s mid-December results show its backlog growing with customers other than OpenAI.
Microsoft (MSFT:NASDAQ) has stopped renewing a deal to rent AI computing power from Oracle (ORCL:NYSE) and is winding it down, Bloomberg reported on Friday. It’s part of a wider review of billions of dollars in cloud partnerships.
That makes two AI deals Oracle has lost in a week. On Wednesday, Oracle canceled an estimated $7 billion chip-leasing deal with Tencent after pressure from the Trump administration, the Financial Times reported.
Investors were already nervous about the stock before either deal fell through. On Friday’s weekly wrap of The Real Eisman Playbook, Steve Eisman, the investor made famous by The Big Short, talked about Oracle’s new stock and bond sale:
“The market has become petrified of Oracle’s balance sheet and its need for capital.”
Microsoft just gave the market one more reason to be.
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A small contract from a very big customer
The deal goes back to 2023, when Oracle agreed to give Microsoft access to servers for an AI-assisted version of Bing. Microsoft has reportedly been switching that capacity off in recent months. The servers run on older-generation chips that no longer meet its specifications. The deal’s full size couldn’t be determined, and Oracle says demand for its AI infrastructure is still strong, including for older GPUs.
Oracle has some evidence for that. On its first-quarter call in September, management said capacity up for renewal was renewed or resold at a 20% premium, even though most of those GPUs were four years old or older. So the chips Microsoft hands back should find another renter. My guess is that this contract is a rounding error next to Oracle’s backlog (the Tencent deal was about 1% of it).
I’m more worried about Microsoft’s wider pullback. Microsoft has reportedly committed more than $80 billion to rent capacity from other cloud companies, and its leaders have grown frustrated with neocloud providers over high costs and delays. When one of the biggest renters of outside AI capacity gets pickier, sellers like Oracle have fewer big buyers to turn to.
OpenAI is carrying more of the load
S&P has said OpenAI accounts for about half of Oracle’s backlog, which stood at $664 billion of remaining performance obligations at Aug. 31. Every customer that leaves pushes OpenAI’s share higher. And OpenAI’s own leaders have discussed resetting next year’s data center capacity expectations after the midterms, the Wall Street Journal reported, though no decision has been reported.
Analysts expect Oracle to turn that backlog into revenue quickly, with sales nearly tripling from fiscal 2026 to fiscal 2029.
On its own, Microsoft’s contract is too small to move those estimates. But they assume OpenAI keeps paying, and Friday’s news makes Oracle more dependent on that.
The bill comes due first
Oracle has to build the capacity before customers pay for it, and its own cash flow no longer covers the cost. Free cash flow went from $11.8 billion in fiscal 2024 to negative $23.7 billion in fiscal 2026.
Analysts don’t expect free cash flow to turn positive until fiscal 2029. Oracle has filled the gap with debt: total debt, including leases, more than doubled from $75.9 billion in fiscal 2022 to $167 billion in fiscal 2026.
S&P rates Oracle BBB-, one notch above junk, and has said it could cut that rating if leverage stays above 4.5x. Oracle has been selling stock too: $19.9 billion of it from February to August. Then on Nov. 2, it sold $10 billion of stock and $10 billion of notes, with coupons of 7% to 8.65%. That used up the entire $20 billion cap on new raises through fiscal 2030 that it set at its Oct. 28 Investor Day. That’s the need for capital Eisman is talking about.
The fear looks justified
Much of Oracle’s cost is also locked in for well over a decade. It has $288 billion of data center leases on 15- to 19-year terms that haven’t started yet, so if OpenAI slows its build, Oracle still owes the rent. The market has good reason to be scared of this balance sheet. I wouldn’t buy the stock until Oracle shows it can grow the backlog with customers other than OpenAI.
Oracle reports in mid-December. The backlog’s growth, and who signed for it, is the number to watch. Of course, if OpenAI keeps paying and the build stays on schedule, Oracle’s plan for positive free cash flow in the second half of fiscal 2028 could still work out.
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