Is Nebius Stock a Buy After Its 36% Pullback?

The artificial intelligence sector has experienced robust market growth in recent years, but recent worries surrounding funding for AI infrastructure have led to a decline in AI stocks over the past month. Nebius Group (NBIS -10.38%), an AI cloud company, has been impacted by these market fluctuations. Shares previously traded near $250 in September, approaching $300 before the AI trade began to wane.

Currently, Nebius is 36% below its peak. The question remains: should investors consider purchasing Nebius Group stock? The financing concerns are significant because Nebius requires substantial capital to construct the AI data centers it leases to AI firms. Here's what you need to know. Computing power is a critical constraint for AI's expansion and adoption.

Enhanced AI models and increased users both contribute to greater demand for computing resources. Nebius plays a crucial role in this regard. The company constructs specialized data centers equipped with Nvidia graphics processing unit (GPU) chips tailored for AI workloads. These data centers are then leased to its clients, primarily Microsoft and Meta Platforms.

Both companies are among the largest AI hyperscalers, and their computing demands propel Nebius towards exponential growth. Wall Street analysts anticipate revenue growth to continue, reaching around $3.34 billion this year and soaring to $12.24 billion the following year. Nebius holds more than $40 billion in long-term commitments from investment-grade customers, and Nvidia, a leader in AI GPUs, holds a stake in the company.

Another challenge for Nebius is that it must build its AI data centers before it can generate revenue. Consequently, the company is consuming substantial capital ahead of the projected revenue surge next year. Management forecasts $20 billion to $25 billion in capital expenditures (capex) this year, financed through a mix of debt and new stock issuance.

This growth has attracted investors, pushing Nebius' market capitalization to $43 billion, which may be a high valuation for a company that is essentially diluting existing shareholders and accumulating debt prior to consistent profitability. Industry-wide concerns center on the availability of additional capital in the debt markets for these companies to utilize as AI spending escalates.

Elon Musk recently expressed on X that many AI cloud companies might fail, citing that the debt markets have already reduced lending to companies without significant revenue streams outside of data centers. Nevertheless, Nebius may be in a solid position. Nebius receives substantial upfront payments from its customers as part of its agreements.

Management projects around $9 billion in total prepayments in 2026, enabling the company to manage its high capex. Nebius also maintained approximately $8 billion in cash at the end of the second quarter. There is no definitive answer since it is challenging to determine Nebius' future margins. Profitable companies often command higher valuations than unprofitable or low-margin businesses.

There is also a risk that hyperscalers may eventually reduce their aggressive spending if they cannot effectively monetize AI to justify continued expenditures. Currently, the stock trades at less than four times the estimated next year's revenue of $12.24 billion. This relatively low valuation may not necessitate unrealistic profit margins to justify it, given the projected revenue growth next year. Thus, Nebius appears to be a suitable buy for risk-seeking growth investors.