Is NBIS the Most Underrated AI Stock?

For nearly two years, the stock market has been steadily bidding up companies like NVIDIA and Microsoft that have emerged as front-runners in the AI race. In addition to these mega-cap companies, though, there are also many smaller companies trying to fill niche spaces in the AI market.

One such company is Nebius Group (NASDAQ:NBIS), a Dutch AI infrastructure company that is building GPU clusters aimed at heavy AI workloads. One project in Kansas City, for example, could house up to 35,000 NVIDIA GPUs once it is at full capacity. Could Nebius be a winning play on AI that much of the market is currently missing?

The Bull Case for Nebius

When NVIDIA in Nebius invested as part of a $700 million funding round, markets took notice that the poster child for AI had seen something unique. But what exactly is it about Nebius that has top tier investors clamoring to join its funding round?

For one, Nebius is a successor company to Yandex, which ran the largest search engine in Russia. The fallout from the war in Ukraine was that Yandex stopped trading on Western exchanges. However, Nebius began trading on the Nasdaq earlier this year, a fact that was only made possible because it’s a holding company based in the Netherlands, and so operates separately from its Russian holdings.

While Yandex had previously built out search engines and advertising platforms, its experience building and scaling tech resources translates easily to its new GPU-as-a-service business model. Nebius also has a great deal of expertise when it comes to managing the tech needs of large companies, and it’s quite likely that this expertise could make it a go-to solution in the cloud AI space.

It sure doesn’t hurt too that Nebius sits squarely in a high growth cloud AI market that is forecast to reach nearly $400 billion by 2030. Having proven itself capable of building infrastructure to handle massive traffic at scale, Nebius has the pedigree needed to carve out a strong market share.

The proof is already in the pudding with Q3 revenues from its AI business mushrooming by 6.5x on a year-over-year basis. Total revenue for the quarter was $43.3 million, about 1.7x the year-ago level. Though Nebius still has a long runway up ahead before it can take off properly, the past year’s growth is proof of concept that management can deliver on the high hopes of investors.

Bulls can point to a cash reserve of $2.29 billion and no long-term debt as a further selling point for the company because there’s ample firepower to build more data centers. It’s also a massive cash hoard when compared to the total market capitalization just north of $11 billion.

Where’s the Downside?

The biggest problem NBIS likely has at this point is that the stock’s price shot up dramatically after NVIDIA’s recent investment was announced. Shares have risen more than 75 percent in the last month alone, opening up the possibility that market enthusiasm could’ve eroded some of the value argument for Nebius.

With that said, NBIS shares don’t appear massively overvalued at the moment. At 12.9x cash flow, it would be difficult to argue that Nebius trades at an outrageous price, especially in a market that tends to assign very high multiples to AI stocks. However, the stock is trading at a fairly steep multiple when it comes to sales. Revenues are expected to reach about $1 billion next year, meaning that NBIS is priced at over 11x forward sales.

This ties into the other possible issue with Nebius, which is the fact that it’s still a relative newcomer to the AI industry. AI will likely be one of the most intensely competitive industries over the next several years, and Nebius will have to navigate pressures from other firms hoping to seize off market share. Unlike Microsoft or NVIDIA, Nebius doesn’t have such a large moat staked out for itself that it can insulate itself from fierce competition in its chosen industry.

Is NBIS a Buy Today?

According to Citrini research, NBIS is a strong buy today with upside potential to $60 per share, at a minimum.

With the company’s previous track record of building the largest search engine in Russia, though, there appears to be significant expertise at Nebius that will likely help it become a major provider of AI infrastructure.

Add to this fact a direct relationship with NVIDIA and a balance sheet that allows Nebius to make investments as it pleases, and there’s a lot to like about this emerging AI business. Investors won’t be able to get the lower prices they could a month or more ago, but there could be enough growth in Nebius to make today’s prices make sense.

When you look at Nebius from the 10,000 foot perspective, the NVIDIA investment combined with the cash hoard on the balance sheet alongside a vote of confidence from savvy investors suggests the price tag doesn’t reflect the business opportunity in the coming years. If recent volatility hints at future share price movements, however, it won’t be a straightforward ride to the top.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.