NBIS: Winning The $17.4B Microsoft Deal Will Drive Market Outperformance

Key Takeaways

• Intensifying competition, open-source adoption, and regulatory hurdles threaten Nebius Group's profitability, margin stability, and expansion prospects in key markets.
  
• High capital requirements and limited global brand recognition may constrain sustainable earnings, customer diversification, and long-term growth opportunities.
  
• Nebius leverages rapid AI demand, global expansion, strategic partnerships, advanced technology, and strong funding to drive recurring revenue, margin growth, and long-term profitability.

Catalysts

A technology company, engages in building full-stack infrastructure to service the global AI industry in the Netherlands, Europe, North America, and Israel.

• The current valuation assumes Nebius Group can sustain hyper growth in AI compute infrastructure, but market-wide demand for AI and machine learning clouds is attracting intense competition and accelerating adoption of open-source technologies, which could drive pricing pressure and erode margins over the next several years, directly impacting long-term profitability and gross margins.
  
• As Nebius Group aggressively expands data center capacity and pursues greenfield builds to support future growth, heightened regulatory scrutiny regarding data sovereignty and localization-especially in core markets such as the U.S., Europe, and Israel-may significantly increase compliance costs and limit expansion potential, which could negatively impact future revenue growth and raise long-term operating expenses.
  
• Heavy capital expenditures for new GPU deployments and data centers are expected in the coming years; if industry trends around digital emissions and environmental regulation become more strict, Nebius could face elevated costs for power, sustainability, and compliance, potentially depressing net margins and overall returns on invested capital.
  
• The positive narrative around recent high-profile customer wins and expanding partnerships underpins high recurring revenue expectations; however, Nebius' limited brand recognition outside its home region may constrain its ability to land large-scale, multiyear enterprise contracts, leading to potential overestimation of future earnings visibility and customer diversification.
  
• Investors appear to be pricing in a scenario where Nebius achieves significant market share gains as enterprises adopt multi-cloud strategies; yet, further consolidation among global hyperscalers and platform integration could make it challenging for Nebius to attract and retain clients, posing risks to long-term revenue and earnings growth if the company fails to sufficiently differentiate its platform.

Nebius Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nebius Group's revenue will grow by 133.9% annually over the next 3 years.
• Analysts are not forecasting that Nebius Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Nebius Group's profit margin will increase from 76.3% to the average US Software industry of 13.4% in 3 years.
• If Nebius Group's profit margin were to converge on the industry average, you could expect earnings to reach $428.7 million (and earnings per share of $1.47) by about August 2028, up from $190.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 64.3x on those 2028 earnings, down from 86.3x today. This future PE is greater than the current PE for the US Software industry at 37.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.16%, as per the Simply Wall St company report.

Nebius Group Future Earnings Per Share Growth

Risks

• Hypergrowth in demand for AI compute and cloud infrastructure, as evidenced by exceptionally strong revenue growth (625% YoY, 106% QoQ) and high utilization, suggests Nebius may benefit from long-term secular trends of accelerating digital transformation and AI adoption, potentially supporting sustained revenue and ARR expansion.
  
• Aggressive geographic expansion, notably into key markets such as the U.K., Israel, U.S. (New Jersey), and Finland-with imminent data center launches and local partnerships-positions Nebius to diversify customer base, tap regional AI investment booms, and unlock new enterprise opportunities, positively affecting top-line growth and revenue stability.
  
• Ongoing strategic partnerships with leading AI ecosystem providers including Nvidia, Cloudflare, Shopify, and major open-source toolsets, combined with increased platform maturity and integrations, increase Nebius's competitive differentiation and could drive recurring revenue and improved gross margins over time.
  
• Enhanced proprietary technology, such as infrastructure tailored for next-gen GPUs (Hopper, Blackwell), improved AI-focused software stack, and delivering near bare-metal performance in the cloud, supports both higher-value offerings and operating leverage, likely benefiting net margins and long-term earnings trajectory.
  
• Flexible capital structure, strong balance sheet with over $4 billion raised and substantial equity stakes in high-value businesses (e.g., Avride, ClickHouse, Toloka), provides Nebius with access to growth funding, enabling continued investment in infrastructure and R&D without excessive shareholder dilution-safeguarding both growth prospects and long-term profitability.

Valuation

• The analysts have a consensus price target of $74.6 for Nebius Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $47.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $428.7 million, and it would be trading on a PE ratio of 64.3x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $68.78, the analyst price target of $74.6 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.