The Real Reason This AI Stock Is Falling, and Why It Might Not Matter

It's been a tough past couple of months for Nebius Group (NASDAQ: NBIS) shareholders. The stock's down nearly 30% from its mid-October peak, starting with worries that artificial intelligence (AI) stocks are in a bubble, followed by mid-November news that its widening losses were even worse than expected. The market's understandably worried.

As veteran investors can attest, however, there's always more to the story. Nebius stock's recent weakness may not be the warning it seems like it is on the surface.

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Nebius is a newcomer

If you're not familiar with it, Nebius offers cloud-based artificial intelligence data center services. It's a specialist, though -- its focus is on AI model training, and increasingly, inference training. And it's doing pretty well. Nebius's top line grew an incredible 355% to $146.1 million during the third quarter of this year following the company's mid-2024 launch.

But the stock's sell-off since mid-October? Broad worries about AI stocks' steep valuations got the ball rolling. Then it was learned in mid-November that the company turned that $146.1 million in revenue into a $119.6 million loss during the three-month stretch ending in September. That compares unfavorably with a loss of only $43.6 million in the same quarter a year earlier, and with analysts' estimates of a loss of only $97 million and sales of $155 million. Against a backdrop of worry that AI stocks are already in a valuation bubble, the market's bearish response was hardly surprising.

There's a much bigger driving force behind this swing to keep in mind here, however.

Not the first, and not the last

In a reasonable world, a stock's price would always make some semblance of sense. We don't always live -- or trade -- in a reasonable world, though. Sometimes hype and speculation drive a ticker too high.

That's arguably what happened here, shortly after Nebius was essentially spun off from Yandex in the middle of 2024 to be the stand-alone AI data center specialist it is now. Of course, that was also a point in time when investors were eagerly looking for any and all new artificial intelligence opportunities, regardless of how underdeveloped they were. All of the interest in Nebius reached a bullish critical mass between May and October of last year, and particularly in September, when Nebius announced a multiyear, multibillion-dollar service contract with software giant Microsoft (NASDAQ: MSFT).

While initially bullish, the inevitable happened -- the stock's surge following the Microsoft news ultimately sparked a wave of profit-taking, bolstered by broader concerns that AI stocks were overvalued. It happens. Quite often, actually.

It's not not a buy

So now what?

With this young stock's first big volatile swing now out of the way, NBIS shares are one step closer to a price that's not only more sustainable but also less volatile. Just bear in mind it's unlikely all of this stock's speculative volatility has been wrung out.

But is it a buy? That depends on your risk tolerance. Nebius is still losing money, and losing more of it the bigger it gets. That won't necessarily be the case forever, however, particularly given its contract with Microsoft and all the other new business it will prompt. There's also no denying the growing need for more specialized AI data center solutions.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.