Nebius (NASDAQ:NBIS) is an AI infrastructure business that operates large data centers and provides cloud capacity to customers that include hyperscalers like Microsoft and Meta.
Over the last 12 months, shares of Nebius have risen by more than 375 percent. Why is Nebius stock up so much, and could now be the time to buy NBIS as a pick-and-shovel play on AI?
Why Nebius Is Skyrocketing
Nebius has had multiple tailwinds working in its favor, the first of which is its position within what is expected to be an extremely high-demand market for many years to come. Growing demand from AI is expected to require a roughly 130 percent increase in data center capacity between now and 2030. As an infrastructure provider, Nebius is poised to take full advantage of this trend. Indeed, Q3’s results showed that Nebius fully sold out its available capacity, indicating extremely strong demand.
While other businesses are working along similar lines to build and sell AI infrastructure, Nebius also has an interesting advantage. Today an AI startup, Nebius was formed from the Dutch parent company that once operated Yandex, Russia’s largest search engine. As such, the management team has considerable experience when it comes to scaling large tech businesses.
This expertise has also allowed Nebius to take a vertically integrated approach to its infrastructure that few other businesses outside of the AI hyperscalers would be able to replicate. By building its own proprietary technology, Nebius is able to achieve both cost efficiency and performance that is fine-tuned to the needs of its customers.
The promise of Nebius’ business is also starting to show strong real-world results. One of the biggest boosts the business has received this year came from a multi-billion dollar agreement to supply infrastructure to Microsoft that was announced in September. This was followed by a similar agreement with Meta in Q3. With hyperscalers coming on board as customers on long-term contracts, Nebius could be in for a period of very strong growth ahead.
Nebius Net Loss Way Up
Although Nebius has delivered massive returns in the past year, the stock could be at risk of a selloff in the event of a downturn in AI stocks. Indeed, recent concerns about AI stock valuations appear to have already contributed to a fairly substantial selloff, with shares of NBIS down nearly 35 percent from where they were a month ago.
This selloff was also driven by Nebius’ Q3 earnings report, which saw an intriguing mix of positive and negative results. On the positive side, revenue rose 355 percent from the year-ago quarter to $146.1 million. Management also announced its new agreement to supply infrastructure to Meta that is valued at $3 billion over the next five years. By the end of next year, Nebius’ ARR is expected to rise into the range of $7-9 billion.
While it may seem odd that such a resoundingly positive earnings report contributed to a selloff, the problems appeared on the bottom line. Even amid triple-digit revenue growth, Nebius saw its net loss expand from $43.6 million in the year-ago quarter to $119.6 million in Q3, an increase of 174 percent.
The selloff also reflected just how astronomical Wall Street’s expectations were for Nebius, as even the revenue the business was able to deliver in Q3 came in under the analyst consensus of $155 million.
These dynamics may put Nebius in something of a precarious position. Although the business is growing at a remarkable rate and has solid prospects for further revenue expansion over the coming 12 months, it’s also losing money at a steady clip and has shown itself to be quite sensitive to losses under anything less than best-case growth scenarios. Given that investors are growing skeptical of the sky-high valuations of AI stocks to begin with, this could prime NBIS for significant near-term volatility.
Where Do Analysts See Nebius Going?
Even with shares starting to look shaky, it’s worth noting that analysts are still extremely bullish when it comes to Nebius.
The range of price targets for NBIS runs from $130 to $206. Given that shares are currently only trading at $88.63, this range implies an upside of anywhere from 46.7 percent to 132.4 percent, with the average price target of $161.40 implying an upside of just over 82 percent.
Nebius Trading at <3x ARR
In thinking about the valuation of NBIS, it’s important to consider the massive amounts of revenue growth management has projected over the coming 12 months. With a market cap of $22.3 billion, Nebius is currently trading at less than three times the mid-range ARR management projects the business to achieve by the end of 2026. This contrasts sharply with the current trailing 12-month price-to-sales ratio of nearly 60.
Nebius’ valuation, therefore, is heavily dependent on its ability to meet its extremely high growth targets. As the post-Q3 selloff has shown, even extremely positive growth results can trigger downward price movement.
Is Nebius Stock a Buy, Sell or Hold?
Although Nebius may have downside risk associated with market sentiment and extremely high expectations of the business, it also has several long-term positives working in its favor. If the business can deliver anything like the kind of revenue growth management projects, the stock’s valuation could look substantially more reasonable by this time next year. Relationships with Microsoft and Meta could also provide long-term stability for Nebius, giving it a solid foundation on which to keep building.
As such, Nebius may be worth looking at for risk-tolerant investors who are bullish on AI and comfortable with volatility. Though the risks could be substantial, the potential upside as Nebius keeps growing could be attractive enough to make it worthwhile.
Even though net losses are still a challenge for the business, top-line growth will likely bolster Nebius’ bottom line. Even in Q3, total operating expenses as a share of revenue were down to just over half of what they had been in the year-ago quarter, falling from 351 percent to 189 percent. This may indicate that Nebius has the potential to outgrow its losses and reach what could prove to be steady profitability driven by recurring revenues.
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.