Nebius' Contracted Power Guidance Continues to Surge. Here's What That Means for the Stock.

Nebius (NASDAQ: NBIS) has been steadily raising its capacity guidance for the end of 2026. The company told investors in February that it expected to have 3 gigawatts of contracted power by the end of 2026. That number jumped to 4 gigawatts in May, and when the company released second-quarter results in August, it told investors to expect 5 gigawatts by the end of the year.

This steady growth comes as the company adds new sites throughout North America and Europe. It also suggests that the stock's rally isn't close to over, even though its price has almost tripled year to date.

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A larger-gigawatt pipeline leads to more revenue

Nebius operates in one of the hottest industries right now. It's the largest of the neocloud providers -- a group of companies that's playing a critical role in the artificial intelligence (AI) boom. Tech giants like Meta Platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT) have already turned to Nebius to help them meet their AI capacity needs.

Meta Platforms has made multiple cloud compute deals this year, in addition to one last year. Its biggest deal came in at $27 billion over the next five years. It's split between a five-year, $12 billion agreement and a second five-year, $15 billion deal. Nebius says it will start to deliver this capacity in early 2027.

It's normal for tech giants to secure hundreds of megawatts in a single deal, and Nebius anticipates having roughly 5 gigawatts of contracted power by the end of 2026. (1 gigawatt equals 1,000 megawatts.) It's entirely possible that Nebius will raise its contracted power capacity guidance again before the end of the year, based on its history.

The ceiling for Nebius' potential revenue will get higher as it secures more megawatts and builds additional data centers. That potential for the business to scale up has been showing up in its recent results. Nebius delivered $582.3 million in Q2 revenue, which was a 454% year-over-year increase. It may continue to deliver similar growth rates for another year as it secures more deals and delivers on existing contracts.

Those same data centers are expensive to build

Although the potential for parabolic revenue growth will excite many investors, it costs a lot of money to build AI data centers, obtain energy, and buy hardware such as Nvidia's (NASDAQ: NVDA) powerful processors. That's part of the reason Nebius issued $4 billion in private convertible notes earlier this year, and some bears point to the company's debt load as a major concern.

Nebius will have to continue borrowing money to build enough data centers to offer 5 gigawatts of AI capacity to hyperscalers. As long as its operating income remains negative, Nebius will have to rely on that type of funding. There is, however, a path out of borrowing money as it realizes revenue from its deals.

The newest Meta Platforms deal alone will provide Nebius with more than $5 billion in annual recurring revenue once it is set up. That's more than the $3 billion in annual recurring revenue that Nebius currently generates. The company expects to have up to $9 billion in annual recurring revenue by the end of the year.

The investment thesis always viewed financing as a way to bridge the gap between Nebius' AI data center ambitions and its net operating losses.

Prepayments make it easier to build the data centers

Even though Nebius won't realize recurring revenue from its investments until it delivers AI capacity to its customers, the company has been securing high prepayments. In its Q2 shareholder letter, it revealed that 70% of deals had partial prepayment, with that prepayment often covering 50% to 60% of associated capital expenditures.

Thus, Nebius gets immediate cash infusions from its contracts, and the ability to negotiate more lucrative deals once those contracts expire. A key note in the shareholder letter hinted at Nebius' leverage as demand for AI cloud capacity surges.

"We could sell our entire 2027 capacity on these terms today. We are deliberately not doing so because we see higher value in retaining some capacity for immediate customer needs," the company said in its shareholder letter.

A slowdown in deal-making indicates that Nebius thinks it can secure better terms by waiting a little longer. It also means capital constraints are not an immediate concern as it builds its gigawatt pipeline and approaches revenue recognition on multiple deals.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.