Nebius: AI's Rising Star Faces Challenges Amidst Explosive Growth and Microsoft Deal
Nebius, a rising star in the AI sector, has sparked investor interest with its explosive growth and lucrative Microsoft 365 deal. However, its high market cap and reliance on major cloud competitors raise concerns. Analysts predict staggering growth rates, but is Nebius truly undervalued?
Nebius' impressive growth trajectory could see it grow by 50% to 75% post-2028, suggesting it might be undervalued by up to 115%. To maintain its current valuation, the company must achieve a hefty 62% annual top-line growth for the next seven years. This growth is fuelled by a perfect storm of rapid expansion, general AI euphoria, and a blockbuster deal with Microsoft 365, securing $17.4 - $19.5 billion in revenues over the next five years.
However, Nebius faces challenges. It's in an early scaling phase, relies heavily on major cloud competitors, and has concentration risk due to its reliance on the Microsoft 365 deal. Despite these hurdles, Nebius expects to turn a profit on the adjusted EBITDA level by the second half of 2025, with a medium-term adjusted EBIT margin of 20% - 30%. After 2029, Nebius' required growth rate drops to a more manageable 20% per year, thanks to the Microsoft 365 deal's potential revenue of $17.4 - $19.4 billion in the next five years.
With a market cap of $28 billion and TTM revenues of $0.25 billion, Nebius' valuation appears high. Yet, its stock has soared by around 500% in the last year. Despite risks, analysts deem Nebius a Strong Buy, citing significant upside potential. However, investors should carefully consider Nebius' growth prospects, risks, and the lack of information about the fair value analysis conducted by an unidentified investment bank.
