Strong demand for AI computing power cannot be overshadowed by the risk of delays in data center delivery, maintaining Nebius (NBIS.US) “holding and watching” rating and target price of $144

The Zhitong Finance App learned that Morgan Stanley released a research report after the third quarter earnings report was announced by artificial intelligence (AI) cloud computing service provider Nebius Group (NBIS.US), saying that although the company's revenue and profitability both exceeded market expectations, demand for AI computing power continued to be strong, customer contract size and computing power rental prices further increased, and delays in delivery of third-party data centers caused the company to lower its 2026 revenue guidelines and delayed some revenue growth until the first half of 2027. Considering the implementation risks faced by data center construction and computing power deployment, as well as the financing pressure brought about by future large-scale capital expenditure, Morgan Stanley maintained the stock's “hold and wait” rating and target price of $144. There is a potential increase of about 12% compared to its closing price of $128.64 on November 12.

According to financial reports, Nebius' third-quarter revenue increased 571.3% year-on-year to US$980.8 million, higher than market expectations. Among them, the company's core AI cloud computing business revenue increased 642.8% year over year to about US$974 million, accounting for more than 99% of the Group's total revenue.

In terms of profitability, Nebius' adjusted profit before interest, tax, depreciation and amortization (EBITDA) for the third quarter reached US$465.8 million. The adjusted EBITDA margin was 47.5%, higher than 40.6% in the previous quarter, and also better than market expectations. According to Morgan Stanley's financial model, the company's third-quarter adjusted earnings per share were $0.31.

However, Morgan Stanley pointed out that Nebius' third-quarter revenue included US$325 million in non-recurring revenue related to its asset-light operating model, accounting for about one-third of the quarter's total revenue. As a result, despite the company's strong financial performance in the third quarter, investors still need to keep an eye on its continued cloud computing revenue growth.

Morgan Stanley analysts Ryan Lountzis and Adam Wood pointed out that the positive signals released by Nebius's current earnings report mainly focus on the three aspects of AI computing power requirements, pricing capabilities, and financing arrangements.

First, the tight supply and demand pattern in the AI computing power market is still driving Nebius to raise service prices. The company's annual contract value for each megawatt (MW) of computing power capacity in the third quarter was over US$25 million, up from US$20 million to US$25 million in the second quarter. Meanwhile, the average hourly GPU rental price increased by more than 20% month-on-month.

Since the beginning of the third quarter, the total value of customer contracts received by Nebius has exceeded $12 billion. Management said that the scale of contracts signed by customers is constantly expanding, the price of computing power capacity is still rising in 2027, and some customers have even begun to seek to lock in computing power resources in 2028.

Morgan Stanley believes that the above indicators show that although market concerns about the scale and return of AI infrastructure investment have heated up, Nebius is still facing strong customer demand and can obtain more favorable commercial terms through higher pricing.

However, delays in data center delivery are becoming a major factor limiting Nebius' short-term performance growth.

Nebius said that due to delays in delivery of several third-party hosted data center projects until the first half of 2027, some of the computing power capacity and related revenue originally planned to be put into operation this year will also be delayed accordingly. Among them, the data center project in Vineland, New Jersey, which is mainly used to service Microsoft (MSFT.US), became the focus of market attention.

According to reports, the third-party data center supplier for this project is gradually discontinuing some temporary power supply facilities while promoting the deployment of the Bloom Energy (BE.US) fuel cell power supply system. This adjustment caused delays in part of the computing power capacity originally scheduled to be delivered to Microsoft this year.

Nebius currently expects to deliver more than 50% of the capacity in the computing power contract signed with Microsoft by the end of 2026, with the remaining portion scheduled to be delivered in the second quarter of 2027.

Affected by these factors, Nebius adjusted the 2026 full-year revenue guide from the previous 3 billion to 3.4 billion US dollars to 3 billion to 3.2 billion US dollars, and lowered the guidance limit by 200 million US dollars.

Meanwhile, the company is expected to achieve over $7 billion in annualized recurring revenue (ARR) in February 2027, compared to the previous target of $7 billion to $9 billion of ARR by the end of 2026.

Morgan Stanley believes that although related revenue was mainly delayed due to changes in computing power deployment time and not due to weakening customer demand, recent delays in project delivery highlight the fact that in an environment where the supply of data centers, electricity and other infrastructure is limited, there is still uncertainty about whether Nebius can convert the contracted computing power capacity into actual revenue in a timely manner.

Despite the impact on short-term delivery schedules, Nebius management maintained its long-term computing power expansion goals. Currently, Nebius has contracted more than 4 gigawatts (GW) of electricity. The company still expects to increase this figure to 5 gigawatts by the end of 2026, and plans to add more than 1 gigawatt of operating capacity in 2027.

To achieve this goal, Nebius recently announced a number of new data center projects and expansion plans, including adding 300 megawatts of capacity in the US state of Missouri, bringing the total capacity of locally contracted projects to 1.1 gigawatts; advancing an AI data center project with a total capacity of 100 megawatts involving multiple campuses in Alberta, Canada; and adding a 50 MW third-party hosted data center project in South Carolina, USA.

Management pointed out that as more computing power capacity comes from the company's own data center in the future, Nebius will be able to better control project construction and delivery times, thereby reducing dependence on third-party data center vendors.

In addition to the progress of computing power deployment, the financing plan formulated by Nebius to support large-scale business expansion is another highlight of this financial report.

Nebius expects capital expenditure to reach $40 billion to $45 billion in 2027. Of this, approximately 75% to 85% of capital requirements are expected to be met through customer prepayments and asset-backed financing associated with existing investment-grade credit rating client contracts. The company anticipates that customer advance payments will reach US$17 billion to US$20 billion in 2027, and this amount is not the upper limit.

Notably, Nebius' new contract in the third quarter was able to cover more than 100% of the capital expenditure requirements of related projects, compared to only 50% to 60% in the second quarter. Management said this trend continued in the fourth quarter.

Morgan Stanley believes that customers are willing to provide a higher percentage of advance payments, which on the one hand reflects the urgent need of large technology companies to lock in future AI computing power resources, and on the other hand, helps Nebius reduce its dependence on external financing during business expansion.

However, even if existing financing arrangements can cover most of the capital expenses, Nebius will still need to raise additional capital for future data center construction. Considering recent changes in the credit market and the company's huge investment scale in the next few years, the stability of financing costs and financing channels will still be factors that investors need to pay close attention to.

Based on the latest financial reports and computing power deployment plans, Morgan Stanley has adjusted Nebius' financial forecast for the next few years. The bank lowered Nebius' 2026 revenue forecast from US$3.389 billion to US$3,050 billion, a decrease of 10%; raised its 2027 revenue forecast from US$10.926 billion to US$12.025 billion, an increase of 10.1%; and raised its 2028 revenue forecast from US$19.059 billion to US$21.018 billion.

In terms of profit, Morgan Stanley predicts that Nebius' adjusted EBITDA will increase from US$1,220 million in 2026 to US$6.921 billion in 2027, and further increase to US$13.348 billion in 2028. For the same period, adjusted EBITDA margins are expected to reach 40%, 57.6%, and 63.5%, respectively.

However, as capital expenditure and financing costs rise, Morgan Stanley expects Nebius to face significant cash flow pressure over the next few years. The bank expects the company's free cash flow in 2026, 2027 and 2028 to be negative US$21.141 billion, negative US$25.113 billion and negative US$27.718 billion, respectively.

In terms of valuation, Morgan Stanley maintains Nebius' target price of $144. The target price is based on the company's EBITDA forecast of about US$13.3 billion in 2028, gives a 6 times corporate value to EBITDA ratio (EV/EBITDA) valuation, and takes into account the net debt level at the end of 2027.

The bank pointed out that although Nebius' vertically integrated AI cloud computing platform has been recognized by large customers, and its lower total cost of ownership and software business monetization potential are also expected to improve long-term profit margins and free cash flow, considering the capital-intensity of the company's business, its valuation ratio should be lower than the software industry average.

Under an optimistic scenario, if Nebius can successfully put more than 5 gigawatts of electricity capacity into operation by the end of 2030, further expand its customer base, and increase profitability through cost advantages and software business monetization, Morgan Stanley believes the stock is expected to reach $400.

Conversely, if the supply and demand for AI computing power gradually balances, competition among large cloud computing service providers intensifies, and data center delivery is more difficult than expected, the stock's valuation under a pessimistic scenario may drop to $70.

Morgan Stanley believes that Nebius' current customer demand and pricing trends are still encouraging, but in an environment where the supply of computing power infrastructure is limited, whether the company can complete large-scale data center construction on time, convert the contracted capacity into actual revenue, and obtain continuous financing at a reasonable cost will be a key factor in determining its future performance and valuation performance.