Nebius' Data Center Expansion Under Scrutiny as AI Demand Meets Financial Strain

What happened

Zacks Investment Research questions whether Nebius' data center buildouts can sustain growth amid rising competition, highlighting that AI demand remains strong but capacity is a bottleneck. DeepValue's report confirms this aggressive expansion, with Q3 2025 capex hitting $955.5 million and multi-billion dollar contracts with Microsoft and Meta driving plans. However, financial metrics reveal severe strain: operating losses widened to $130.2 million, and free cash flow plunged to -$1.035 billion in the same quarter. Critical risks from the report include high customer concentration, an adverse internal control opinion, and potential oversupply if AI demand slows or hyperscalers adopt custom accelerators. Despite rapid revenue growth, the $23 billion market cap prices in optimistic execution, leaving minimal margin for error in a capital-intensive and competitive sector.

Implication

The focus on data center expansion amplifies capital intensity, risking further cash burn if revenue growth fails to keep pace with escalating investments. Negative free cash flow and rising liabilities threaten the company's ability to self-fund expansion, increasing reliance on dilutive or costly financing. High dependence on Microsoft and Meta contracts exposes Nebius to concentration risks, where any contract delays or renegotiations could severely impact revenue and utilization. Governance weaknesses, evidenced by the adverse internal control opinion, raise operational red flags that could undermine financial reporting and execution credibility. Given crowded market sentiment and stretched valuations, trimming positions or awaiting concrete signs of profitability and customer diversification is advisable to mitigate downside exposure.

Thesis delta

The new article reinforces but does not shift the core investment thesis from the DeepValue report, which already identified data center expansion as a critical yet risky growth lever. It underscores the urgency of execution but adds no new information that alters the probability weightings of the Base, Bear, or Bull scenarios. Thus, the thesis remains unchanged: investors must monitor contract ramp-ups and cash flow trends closely, as the current price offers limited downside protection against potential missteps.