NEBIUS

Our key takeaways from Nebius’ second-quarter call are that GPU spot rental rates continue to climb as the artificial intelligence supply/demand imbalance intensifies and neoclouds want to maximize value extracted from short-term pricing.

Why it matters: Average contract value per megawatt (MW) has more than tripled year to date, from an average of $12 million/MW in early 2026, to $20 million/MW in the second quarter, and some third-quarter contracts being signed at $40 million/MW. We think management is avoiding long-term capacity commitments, favoring 3-6 month contracts, as it believes GPU spot rates will continue to climb, allowing a massive pricing tailwind in late 2026 and 2027. Quarterly revenue grew 454% to $582 million with a negative 30% operating margin. We estimate higher-priced contracts will have a significant positive impact on profitability in late 2026 and 2027. This massive pricing tailwind is supply/demand driven, not driven by any durable differentiation, and we remain cautious about assuming such pricing persists into perpetuity. Once the imbalance eases, the pricing situation would play in reverse.

The bottom line: We raise our fair value estimate for no-moat Nebius to $150 from $120, reflecting higher GPU rental prices in the next three years, improving operating margins, and reducing the free cash flow burn. We estimate Nebius will burn close to $30 billion in free cash flow in the next five years, requiring continued equity and debt raises.

Big picture: Nebius' thesis shows reflexive elements because its valuation partially shapes its fundamentals. A high share price is a platform for future growth with less dilution, faster buildouts, and stronger investor sentiment. But if sentiment weakens the loop can reverse—cost of capital raises, dilution increases, and fundamentals might deteriorate. Nebius needs to maintain a high share price to keep growing, and an AI spending slowdown would hinder its ability to attract new capital and grow.

Our fair value estimate for Nebius is $150 per share.

Our fair value estimate goes hand in hand with our Very High Uncertainty Rating, and our model is highly sensitive to our cost of capital, GPU economic life, and utilization rate assumptions.

We model revenue of $4.4 billion in 2026 and $14.6 billion in 2027, massive growth from the $530 million in 2025. The five-year $17.4 billion revenue deal signed with Microsoft and the five-year $27 billion revenue deal signed with Meta are the main drivers of this growth, with growth from enterprise customers in third place. Our fair value estimate implies an enterprise value/sales multiple of 11.5 times for 2026 and 3.5 times for 2027. We estimate this is a discount to peers Azure and AWS, as we believe they would command higher sales multiples if they were valued as stand-alone entities, given their outstanding profitability.

Despite this growth inflection, we don’t expect that Nebius will become free-cash-flow-positive any time soon due to the massive depreciation and capital expenditures cycle required to satisfy this growth. We expect Nebius’ operating margins will reach a meaningful inflection around 2030, once its asset base reaches a more stable level and new data center deployments represent a smaller percentage of the asset base. As a result, our fair value estimate is primarily driven by our terminal stage-three assumptions. We expect a $7 billion-$10 billion annual free cash flow burn until 2028. Should Nebius demonstrate a clearer and faster path to profitability than what we currently anticipate, we could revise our fair value estimate higher.

After 2030, we model revenue growing in the high-single-digit range supported by steadier but more moderate artificial intelligence growth, while operating margins trend to the 25% range as Nebius is able to upsell high-margin software and services. We don’t anticipate Nebius will ever reach the operating margins of Azure or Amazon Web Services, which are in the 35%-45% range today, as it is behind in ecosystem depth, pricing, and proprietary platforms.

We value Nebius using a very high systematic risk equity premium, which results in a 11.5% cost of capital. Investors should note that there is substantial shareholder dilution ahead to offset the multibillion-dollar cash flow burn required to fund large-scale data center construction over the next five years. We anticipate Nebius will need to raise more than $30 billion in debt and equity over the following five years to fund its growth ambitions. Management has a preference for equity over debt, which we also prefer, but financing will be a combination of both.

Our $150 fair value estimate assumes an average GPU life of five years, given that the life of GPUs can now be extended with proper maintenance and cooling techniques. We use an 80% average utilization rate for Nebius’ GPU fleet.

In our bull case, we assume an 85% long-term utilization rate and a six-year GPU useful lifespan, which results in higher revenue growth and terminal operating margins, reaching a $215 valuation. If terminal utilization rates drop to 65% or below in perpetuity, we estimate the value of Nebius’ equity will be close to zero.

We give Nebius a no moat rating.

Although we like Nebius’ strategy among a host of new cloud (or neocloud) companies that have emerged since the inflection point in AI, we don’t believe it has a competitive advantage. The massive capital expenditure required to set up large data centers, together with the intense depreciation schedules of GPUs and a smaller number of software and services compared with the established hyperscalers, results in returns on invested capital below the cost of capital. Additionally, we believe Nebius will not break even on operating profits until 2030, creating significant uncertainty about the timing of positive ROICs.

The insatiable demand for artificial intelligence has caused a supply/demand imbalance where established hyperscalers like Microsoft, Amazon, Google, and Oracle cannot satisfy all the demand. This has triggered the appearance of neocloud businesses, which have raised massive amounts of equity and debt to set up data centers, purchase GPUs from Nvidia, and rent them out to customers.

Our unit economic analysis indicates the internal rate of return for renting GPUs over a five-year period is in the 20%-30% range. This projection holds true as long as utilization rates remain above 80% and considers meaningful rental price declines over the GPU’s useful lifespan. However, the attractive IRRs look more like a consequence of the temporary supply/demand imbalance for AI, rather than any structural competitive advantage. IRRs normally collapse when utilization rates decline to 60%-65%.

Many neocloud companies originated as crypto miners that redirected their data centers and GPU fleets to AI once the market inflected. Yet repurposing a mining facility into a high-performance data center requires structural changes in aisle design, raised floors, cooling, hardware, and software. As a result, most neocloud businesses offer bare-metal services, meaning they secure land, power, and GPUs and rent them out while leaving most technical responsibilities to the client. Once the supply/demand situation of AI normalizes, our view is that neocloud firms that simply purchase and rent GPUs without any real differentiation will face serious struggles as their current business models look commoditized and only viable due to the current scarcity of AI resources.

On the contrary, Nebius is opting for a full-stack approach, involved in every stage from data center design to software orchestration. For instance, Nebius has shown a preference for designing its own servers and racks rather than relying on off-the-shelf solutions, optimizing for cooling efficiency, density, and power utilization. This improves performance per watt and lowers the total cost of ownership for customers. Given how fast the AI supply chain is advancing, having operational control seems the right strategic decision.

Nebius’ long-term strategy hinges on migrating beyond basic hardware provision. We support this focus as the real value and upselling opportunity is in building high-margin layers of software and managed services on top of the hardware infrastructure. This reduces customer friction and approaches the value proposition of hyperscalers. While achieving similar levels of security, reliability, and service breadth as hyperscalers is a huge task, we see this strategy as the only one with any chance of long-term success.

We estimate Nebius generates around $8 million-$10 million in revenue per megawatt installed, while hyperscalers like Microsoft and Amazon Web Services likely generate two- to three times more due to their large ecosystems and extensive managed services portfolios. Nebius' ability to grow this number depends on its ability to deliver and incrementally charge for more software and services. Today, Nebius provides services like workload orchestration, automated error handling, elastic GPU autoscaling, demand balancing across regions, and fast recovery from a system failure. Superior software improves GPU utilization, uptime, and lowers the technical burden for clients—key drivers of customer satisfaction. While we recognize the operational excellence in what Nebius is doing, it is not enough to support a structural competitive advantage.

Another limitation we see for Nebius is that its current AI model ecosystem is heavily reliant on open-source solutions like Llama, DeepSeek, or OpenAI’s gpt-oss. In the AI world, scale and capital correlate with more computing power, which ultimately leads to superior proprietary models like ChatGPT, Google’s Gemini, or Anthropic’s Claude. Given that most of these models are owned or have partnered with Big Tech firms, they will likely have greater financial resources and reinvestment capacity than open-source solutions. While open-source models will remain important for tech-savvy users, they are unlikely to capture the majority of AI computing demand. A partnership with a top-tier model would strengthen Nebius' business case.

Nebius is growing at a tremendous pace. Computing deals signed with Microsoft and Meta, despite a likely low margin, build credibility about Nebius' technical capabilities, and are a first base to chase more profitable enterprise clients.

Nebius has the right strategic approach, aiming to transition from a bare-metal provider to a full-stack cloud. In our view, this is the only chance to build differentiation and loyalty across its clients.

Nebius' operational execution is strong, launching new services fast. Its GPU fleet has high uptime and a fast recovery in system failure.

Nebius has a multibillion-dollar cash flow burn period ahead, which will require significant equity and debt raises to fund the huge capital expenditure required to build data centers and buy GPUs.

Nebius operating model is highly sensitive to utilization rates. If utilization rates go below 65%, operating margins and the value of the equity erode substantially.

The AI supply chain is advancing at an unprecedented pace on all fronts: hardware, software, power, networking, and cooling. Nebius needs to keep up with all these changes to remain operationally strong and secure new clients.