Nosebleed Valuation: How Nebius's Microsoft Deal Shakes the Market

Overview of Nebius Group

Nebius Group is a prominent player in the artificial intelligence infrastructure sector. Based in the Netherlands, the company's primary focus is on developing and providing AI-centric cloud platforms tailored for intensive AI workloads. The core business of Nebius involves creating full-stack infrastructure for AI, which includes large-scale GPU clusters, cloud platforms and tools, and services aimed at developers.

Key Business Segments

Nebius operates through two main business segments:

• AI Infrastructure: Major technology companies such as Meta, Microsoft, and Alphabet are investing heavily in data centers to train and optimize their large language models. Due to the significant capital involved, these companies often struggle to build data centers quickly enough and rely on firms like Nebius to meet their needs.

• AI Cloud Services: Nebius also offers its AI infrastructure as a service, enabling big tech companies to access necessary resources at a more cost-effective rate.

What Sets Nebius Apart

What distinguishes Nebius from many of its competitors is its vertically integrated model. This means that the company provides its own proprietary AI software and hardware, including servers and racks. This integration allows for greater control over the entire AI infrastructure ecosystem.

Strategic Partnership with Nvidia

Nvidia is a leading chip provider in the AI market. To run the most advanced AI models, companies typically require Nvidia’s GPUs. With high demand for these GPUs, many firms find it challenging to secure the latest technology. However, Nebius benefits from a partnership with Nvidia, which grants it priority access to the company's most powerful GPUs. Additionally, according to recent filings, Nvidia holds a stake worth approximately $700 million in Nebius, indicating a strong commitment to the company.

Evaluating Nebius Shares

Nebius has a notably high price-to-sales ratio, nearing 100x. As AI hype continues to grow on Wall Street, the company's shares have surged by nearly 400% since its initial public offering late last year.

Microsoft Deal as a Game Changer

One of the most significant developments for Nebius was its major multi-year deal with Microsoft. The contract, valued at $17.4 billion with potential to reach $19.4 billion, involves providing Microsoft with access to its Vineland, New Jersey data center and the GPUs within it.

Significance of the Microsoft Deal

The impact of the Microsoft deal on Nebius cannot be overstated. On September 8th, the company's market cap stood at $15.29 billion. Overnight, it secured a contract worth more than its market cap. Zacks Consensus Estimates now predict multi-triple-digit revenue growth for the foreseeable future.

Market Reaction and Historical Context

Following the announcement of the Microsoft contract, Nebius shares experienced a sharp increase of 50%, with daily trading volume surging to 557% above the norm. While a 50% price gap may seem daunting, historical examples suggest that such events can lead to substantial returns.

• 2013 Tesla (TSLA): After reporting its first quarterly profit, TSLA shares jumped 24% on volume seven times the norm. Over the next four months, the stock rose from a split-adjusted $69 to $194.

• 2025 Oklo (OKLO): Following pro-nuclear energy legislation, OKLO shares spiked 23% on volume 518% above the daily average. Since then, the stock has climbed from $48 to $84.

• 2013 Meta Platforms (META): META shares rose 30% after an earnings release revealed unexpected mobile advertising revenue growth. The stock has since soared from $34 to $755.

These examples illustrate that when accompanied by a groundbreaking fundamental catalyst, large price gaps can present attractive investment opportunities.

Conclusion

With its vertically integrated model, strategic partnership with Nvidia, and the recently announced game-changing contract with Microsoft, Nebius Group has established itself as a formidable leader in the AI industry. The company's unique position and significant deals highlight its potential for continued growth and success in the evolving AI landscape.