One of the interesting characteristics about the stock market this year is that investors have appeared to finally identify a small collective of market-beating technology companies beyond the megacap tech titans that comprise the "Magnificent Seven."
Among the newcomers is a company that operates alongside the scorching-hot semiconductor industry -- Nebius Group (NBIS +5.36%), whose shares have risen by 346% so far this year (as of Oct. 27).
Let's explore what's been driving investor optimism in Nebius, and assess if the stock remains a good buy before the company reports third-quarter earnings on Nov. 11.
What does Nebius do and why is it important for artificial intelligence?
Nebius offers artificial intelligence (AI) infrastructure as a service. More specifically, the company procures high-performance accelerators -- known as graphics processing units (GPUs) -- from Nvidia and then rents access to that hardware through a cloud-based platform.
Nebius primarily competes with CoreWeave and Oracle, and to a lesser extent, a company called Iren.
Image source: Getty Images.
What should investors be on the lookout for?
Over the last year, Nebius has expanded its data center footprint dramatically. To date, the company's AI infrastructure spans Kansas City, New Jersey, Iceland, France, Finland, and Israel.
Management has repeatedly stated that it aims to reach a run rate of $1 billion in annual recurring revenue (ARR) by December. In my eyes, this forecast has become stale. The reason? Well, last month Microsoft signed a five-year, $17.4 billion deal with Nebius to expand data center capacity.
Clearly, the company has well exceeded its prior ARR target. When Nebius reports Q3 earnings, I think investors should listen closely to any commentary related to the following:
- Microsoft partnership: Now that the deal with Microsoft is underway, it'll be interesting to see whether management touches on any details about how this collaboration could deepen over time.
- Potential for new hyperscalers: While billions in new revenue from Microsoft sounds great on the surface, the caveat is that now much of Nebius' ARR is concentrated with one customer. I'm curious if management will drop any hints that new business with other cloud hyperscalers -- such as Amazon Web Services (AWS) or Google Cloud Platform -- could be in the works.
- Balance sheet strength: At the end of the second quarter, Nebius held $1.7 billion in cash on its balance sheet. While the company is well funded and could pursue further financing options through convertible notes, building AI infrastructure is capital intensive. Hopefully management provides thorough analysis around the expected costs of new capacity buildouts, a detailed capital allocation strategy, and an expected timeline to yield a return on investment on this infrastructure.
Perhaps the biggest variable to watch for is whether management actually provides new targets for financial guidance.
Now that the prior goal of $1 billion in ARR has effectively been achieved, I'm curious if Nebius will present something along the lines of a five-year ARR target -- which could potentially suggest that management is optimistic over its ability to win over more hyperscalers and meaningful AI developers.
NASDAQ: NBIS
Key Data Points
Is Nebius stock a buy?
It's hard to deny that Nebius is poised to benefit from strong secular tailwinds -- given the AI infrastructure wave is expected to reach $7 trillion over the next five years.
Nevertheless, I tend to shy away from investing in momentum stocks. To me, Nebius has become more of a darling of the retail investing community -- meaning it is potentially more vulnerable to pronounced volatility dynamics surrounded by hype and day traders.
While I like Nebius as a structural play within the broader AI realm, I think it's best to wait and listen to management's commentary during the earnings call in a couple of weeks. As long-term investors, there will be plenty of opportunity to invest in AI infrastructure players such as Nebius -- likely at more reasonable entry valuations, too.
