Nebius: The Hidden AI Infrastructure Gem Trading at a 50% Discount

Key Points

• Artificial intelligence (AI) has fueled blistering results for some of the biggest names in the space.

• Neocloud operator Nebius has attracted a lot of attention and is getting plenty of love from Wall Street.

• The company sports an attractive valuation, particularly compared to some of its nearest rivals.

• 10 stocks we like better than Nebius Group ›

It's no secret that artificial intelligence (AI) has come into its own over the past few years, and some of the biggest names in technology have benefited greatly from advances in generative AI. Palantir and Nvidia are among the biggest winners, soaring 2,180% and 1,030%, respectively, since early 2023. With gains of that magnitude, it isn't surprising that investors are turning over every stone looking for the next big AI winner.

One area that's been attracting a lot of attention is that of neoclouds, which provide on cloud-based AI processing resources for companies. For example, since CoreWeave went public in late March, the stock has gained an impressive 215% (as of market close on Friday). Another example is rival neocloud provider Nebius Group (NASDAQ: NBIS). Since it resumed public trading in mid-October, the stock is up 122% and shows no signs of slowing.

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The prevailing secular tailwinds and bullish sentiment among investors have helped fuel Nebius' rise, and one Wall Street analyst believes Nebius is an unsung hero in the space. Let's dig further into the concept of neoclouds and why Nebius could be a big winner in the AI revolution.

Image source: Getty Images.

What exactly is a neocloud?

Most investors are familiar with the concept of cloud computing, which provides users online access to applications, data processing, and data storage. The flexibility, improved security, and ability to scale offered by the cloud make it an attractive choice for many businesses. Furthermore, most AI processing takes place in the cloud, which has spurred even greater adoption.

Neoclouds have emerged to fill a vital need in the AI revolution. In simplest terms, a neocloud is a special category of cloud provider that has stockpiled the graphics processing units (GPUs) and other infrastructure necessary for AI processing and high-performance computing. Some refer to these offerings a GPU-as-a-service (GPUaaS).

That's where Nebius comes in. The company offers an "AI-centric cloud platform building large, cost-efficient GPU clusters to service the explosive growth of the global AI industry," according to its website. The results tell an intriguing tale. In the first quarter, revenue of $55.3 million soared 385% year over year, albeit from a small base. Perhaps even more impressive is the annualized run rate from its core AI services of $249 million, an increase of 684%.

Nebius isn't yet profitable, as it scrambles to expand its data center network to meet the blistering demand of AI. The company is bringing three new locations online in 2025 and expects to have 100 megawatts (MW) of contracted capacity by the end of the year. In its Q1 shareholder letter, Nebius notes that the majority of its AI processing capacity is from Nvidia H200 AI chips and it will begin to roll out Nvidia Blackwell, Grace Blackwell, and Blackwell Ultra chips in the second half of 2025.

The combination of its expanding data center network and increasing AI processing power will help take Nebius' growth to the next level.

Wall Street is increasingly bullish

Wall Street is incredibly bullish on Nebius. Of the four analysts who offered an opinion in July, all four rate the stock a buy or strong buy. Furthermore, analysts' consensus estimates of $66.50 represents potential gains for investors of 50% compared to the stock's closing price on Friday. Goldman Sachs analyst Alexander Duval called Nebius a "top pick" on Sunday, initiating coverage with a buy rating and a price target of $68, or potential upside of 53% (again, compared to Friday's closing price).

Duval cites Nebius' full-stack software, cost efficiencies, and the ability to operate at scale as key advantages. He also believes the rising adoption of generative AI will continue to drive demand for the foreseeable future. Additionally, the analyst notes that Nebius trades at an enterprise-value-to-sales ratio of 3, which is significantly less expensive than rival CoreWeave, which commands a multiple of 5. This suggests investors may well be underestimating Nebius' potential.

On a related note, Nvidia owns a stake in Nebius, with nearly 1.2 million shares valued at roughly $25 million. This suggests a deepening relationship between the companies.

This illustrates why Nebius is a hidden gem in the AI neocloud space and might be worth a look.

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Danny Vena has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia, and Palantir Technologies. The Motley Fool recommends Nebius Group. The Motley Fool has a disclosure policy.