Nebius (NBIS +6.74%) has been one of the most explosive stocks on the market this year. The artificial intelligence (AI) cloud infrastructure, or neocloud, company evolved out of the Russian tech company Yandex, which was delisted from the Nasdaq after Russia invaded Ukraine. The company sold off its Russian assets and rebranded as Nebius, based in Amsterdam.
Now, Nebius is one of the fastest-growing stocks on the market. In the second quarter, revenue jumped 625% to $105.1 million, and the stock is up a whopping 424% this year, outpacing virtually every other AI stock on the market.
Nebius surged by nearly 50% in one session after it announced a blockbuster deal with Microsoft. The tech giant signed a contract for $17.4 billion in GPU services through 2031. This shows that despite the company's relatively low revenue, it's bringing in billions in contract commitments. Nebius' larger peer, CoreWeave, is also delivering massive growth, with its revenue up 207% in the second quarter to $1.21 billion.
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Why the neocloud is growing so fast
The so-called hyperscalers -- the big cloud computing companies like Amazon, Microsoft, and Alphabet, along with Meta Platforms -- are expected to spend roughly $300 billion on capital expenditures, with much of that going to data centers to meet demand for AI computing power.
Nebius and CoreWeave are much smaller than the hyperscalers, so by dollar value, they are growing more slowly. Still, demand for AI cloud servers is so strong that it is propelling these companies' revenue up triple digits, and prompting Microsoft to commit $17.4 billion to Nebius.
As long as AI demand remains strong, we're likely to see outsized growth from Nebius and CoreWeave continue this year.
But it's a risky model
The neocloud companies need to spend on capex to build data centers and fill them with GPUs. In order to fund that spending, it has to take on debt.
Nebius had $1 billion in debt at the end of the second quarter against $1.7 billion in cash, and it will need to borrow more money to fund its expansion and to make up for losses. Because of that business model, Nebius is also losing a lot of money. The company reported an operating loss of $111.2 million in the second quarter, more than it brought in for revenue.
By comparison, the larger CoreWeave now has $11 billion in debt and is on track to pay more than $1 billion in interest expense this year, though Nebius may be on a better trajectory.
NASDAQ: NBIS
Key Data Points
What Nebius will look like in a year
More than most AI stocks, Nebius and CoreWeave seem like avatars for the broader AI boom. Their performance is likely to track with broader interest and demand for AI computing power.
Based on the recent momentum, there looks to be plenty of runway left in the AI boom, meaning there's a good chance Nebius will be higher in a year, and it could be significantly higher if it can secure more deals like the one with Microsoft.
However, Nebius remains a high-risk stock, and it's likely to take a dive if the AI narrative wanes. There are a number of reasons that could happen, whether it's economic weakness, a slowdown in AI capex spending, disappointing software sales, or disillusionment with AI products.
For now, the momentum is on Nebius' side, but the stock fell more than 50% earlier this year, one sign of how quickly the narrative can change. There's a wide range of potential outcomes for Nebius over the next year, but based on the level of demand it's seeing, it should find success.
