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Title Fulfillment: Is Nebius Stock the Next Nvidia? Don't Bet on It
Nebius Group (NBIS), the AI cloud infrastructure provider, has seen its stock price skyrocket, leading some investors to wonder if it could be the next Nvidia. While the company boasts impressive revenue growth and contracts with major players like Microsoft and Meta Platforms, a closer look at the numbers reveals a more speculative picture.
Growth vs. Profitability: A Reality Check
The hype around Nebius is fueled by its staggering revenue growth. A 355% increase in revenue in the third quarter is nothing to scoff at. But growth alone doesn't guarantee long-term success. The key question is: can Nebius translate this growth into sustainable profitability? The current gross margin of -1312.43% is, to put it mildly, alarming. It suggests the company is spending far more to deliver its services than it's earning in revenue.
This negative gross margin raises several red flags. Is Nebius underpricing its services to attract customers? Are its operational costs excessively high? Or is there a combination of factors at play? Without a clear path to positive gross margins, the company's long-term viability is questionable.
The contract with Microsoft, potentially worth up to $19.4 billion, is undoubtedly a major win for Nebius. However, revenue from this deal isn't expected to start flowing until 2026. That's a long time to wait for a company that's currently burning cash. And there's no guarantee that the final value of the contract will reach the maximum amount. (Contract values are often subject to change based on various factors.)
The comparison to Nvidia is tempting, but ultimately misleading. Nvidia is a well-established company with a dominant position in the GPU market and a track record of consistent profitability. Nebius, on the other hand, is a relatively new player in the AI cloud infrastructure space with a lot to prove.
The Speculative Factor: Cramer's Caution
Jim Cramer's assessment of Nebius as "too speculative" shouldn't be dismissed lightly. Cramer’s Lightning Round: Nebius is ‘too speculative’ Cramer isn't always right, of course, but his concerns about the company's lack of profitability are valid. He recommends Dell Technologies instead, which is a more established and profitable player in the tech industry.
Nebius' plan to aggressively expand its data center capacity is ambitious. The company expects to increase its connected data center power capacity almost tenfold by the end of 2025. While this expansion could fuel further revenue growth, it also requires significant capital investment. Will Nebius be able to secure the necessary funding without diluting its existing shareholders?
The company's announcement of an at-the-market equity program for up to 25 million shares is a potential red flag. This program allows Nebius to issue new shares and raise capital, but it also dilutes the ownership stake of existing shareholders. (Dilution reduces the value of each share.)
I find the analyst estimates of Nebius' revenue to be overly optimistic. The claim that Nebius could achieve $4.34 billion in revenue in 2027 seems far-fetched, given the company's current financial performance. It's important to remember that analyst estimates are just that – estimates. They're not guarantees.
A Hype Bubble Waiting to Burst?
Nebius is undoubtedly operating in a high-growth market. The demand for AI cloud infrastructure is expected to surge in the coming years. However, the company's high valuation (54 times sales) and lack of profitability make it a risky investment. While Nebius could potentially deliver significant returns, it's also vulnerable to a sharp correction if its growth slows or its financial performance disappoints.
The comparison to Coreweave is interesting. Coreweave is another AI cloud infrastructure provider that has attracted significant investor interest. However, Coreweave is also a private company, so it's difficult to compare its financial performance to that of Nebius. (Private companies aren't required to disclose as much financial information as public companies.)
The Numbers Don't Justify the Hype
Nebius has potential, but it's far from being the next Nvidia. The company's lack of profitability and high valuation make it a speculative investment that's best avoided by risk-averse investors.