The recent sharp pullback in Oracle's stock price following its disclosure of aggressive capital expenditure plans has drawn market attention. This shift reflects a turning point in investor sentiment toward AI investments, where the once-dominant narrative of boundless optimism driven by capex growth is being reassessed. Investors are now scrutinizing three key risk dimensions: return on investment, financing conditions, and corporate interconnectivity.
1. **Can Massive Capex Deliver Tangible Returns?** The AI boom has spurred tech giants to pivot from asset-light models to capital-intensive infrastructure like data centers and computing power. Combined capex by five major hyperscalers in AI-related areas hit $357.2 billion over the past four quarters, with projections reaching $500 billion by 2026. Notably, Oracle’s capex now exceeds its free cash flow by 582%, raising ROI concerns. Despite AI’s potential, unclear monetization paths and diminishing marginal returns—amid rising equipment costs—suggest the sector remains in a "diseconomies of scale" phase. Market valuations may face downward revisions if expected returns fail to materialize.
2. **Rising Reliance on External Financing and Credit Risks** Oracle’s ambitious plans rely heavily on external funding, with free cash flow plunging to -$10 billion last quarter. Its net debt of $97.7 billion dwarfs EBITDA of $28.9 billion, triggering a spike in credit default swap (CDS) spreads to 140+ bps—a 2008-level high. Similar strains are emerging elsewhere: CoreWeave’s stock fell 37% after revenue misses and a $2 billion convertible bond offering, while its CDS spreads surged to 773 bps. Tightening credit conditions could jeopardize AI investment sustainability.
3. **Interconnected Tech Giants: A Domino Effect?** The AI ecosystem’s deep interdependencies—exemplified by NVIDIA’s $10 billion commitment to OpenAI, Oracle’s $300 billion cloud deal with OpenAI, and cross-investments in firms like CoreWeave—create systemic vulnerabilities. Any single player’s distress could ripple across the network, as seen when Oracle’s slump dragged down peers, including Broadcom, despite its solid earnings.
4. **Broader Economic Implications** AI-driven investments contributed 0.7 percentage points to U.S. GDP growth in H1 2025. However, slowing capex momentum due to ROI doubts and financing constraints could pressure 2026 growth. Wealth effects are another concern: the top 10% of earners, who hold 87% of U.S. stocks, drive nearly half of consumption. A market correction may weaken spending, exacerbating labor market softness.
*Charts referenced depict: - Hyperscalers’ rising capex (Bloomberg) - Capex-to-FCF ratios (FactSet) - Oracle’s widening CDS spreads (Bloomberg) - Tech firms’ interconnected deals (Bloomberg) - AI’s GDP contribution (Haver/Fed) - Slowing equipment investment growth (FactSet)*