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SUMMARY
Parkev Tatevosian, CFA, analyzes Nvidia's decision to increase its equity stake in Nebius to 9.3%, resulting in a sharp rise in Nebius's share price. The discussion covers the implications for Nebius's financial outlook, business model, and current valuation, ultimately leading to a hold recommendation.
MAIN POINTS
- Nvidia discloses a 9.3% equity stake in Nebius, causing Nebius's share price to jump nearly 20%.
- The partnership involves Nvidia providing financing to Nebius, which uses Nvidia products in its AI infrastructure buildout.
- Nebius invests tens of billions in AI infrastructure, with Nvidia as its largest partner, and aims to generate long-term revenue from these investments.
- Nebius's stock price reaches $220 per share, up 159% year-to-date, prompting a downgrade from buy to hold after surpassing $200.
- Nvidia's backing lowers Nebius's cost of debt and boosts free cash flow projections, improving the company's financial outlook.
- Despite improved prospects, Nebius is rated as a hold due to its limited market history and current fair valuation.
DETAILED ANALYSIS
Nvidia's recent disclosure of a 9.3% equity stake in Nebius has had a significant impact on Nebius's stock, with shares rising by nearly 20% following the announcement. This move builds on Nvidia's initial investment in early 2025 and signals a deepening partnership between the two companies. The relationship is characterized by what some analysts refer to as circular financing: Nvidia provides capital to Nebius, which in turn uses that capital to purchase Nvidia's advanced AI computing products.
This arrangement, while beneficial for both parties, means that Nebius's purchases of Nvidia products are not entirely organic, as they are partially enabled by Nvidia's own investment.
Nebius is currently engaged in a large-scale buildout of AI infrastructure, investing tens of billions of dollars upfront. The company’s business model is likened to real estate investment, where substantial initial capital outlays are followed by long-term revenue generation, in this case through renting out AI computing capacity. Nvidia's GPUs and systems, including the Grace Blackwell and upcoming Vera Rubin systems, are central to Nebius's infrastructure, making Nvidia a critical partner.
The announcement of Nvidia's increased stake has driven Nebius's share price to $220, representing a 159% increase year-to-date in 2026. However, after the stock surpassed the $200–$250 range, the rating was downgraded from buy to hold. The strategic backing from Nvidia is expected to enhance Nebius's free cash flow prospects and lower its after-tax cost of debt, as lenders view the company as less risky with Nvidia's involvement.
Free cash flow projections have been revised upward, with positive free cash flow anticipated starting in 2029, now estimated at $4 billion annually, up from a previous estimate of $3.5 billion. The fair value of Nebius is calculated at $208 per share, close to the current market price, indicating the stock is fairly valued. Despite the improved outlook, Nebius is maintained at a hold rating due to its short operating history and the need for further track record development before being considered an excellent business.
LINKS
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