Following the release of third-quarter earnings by AI cloud computing services provider Nebius Group (NBIS.US), Morgan Stanley issued a research note stating that although the company's revenue and profitability both exceeded market expectations, AI compute demand remains robust, customer contract scale and compute leasing prices continued to rise, delays in third-party data center deliveries prompted the company to lower its 2026 revenue guidance and defer a portion of revenue growth to the first half of 2027.
Taking into account execution risks in data center construction and compute deployment, as well as financing pressures from future large-scale capital expenditures, Morgan Stanley maintained its "Equal Weight" rating on the stock and a $144 price target, implying approximately 12% potential upside from its November 12 closing price of $128.64.
According to the earnings report, Nebius third-quarter revenue surged 571.3% year-over-year to $980.8 million, surpassing market expectations. Its core AI cloud computing business revenue jumped 642.8% year-over-year to approximately $974 million, accounting for over 99% of total group revenue. On the profitability front, Nebius third-quarter adjusted EBITDA reached $465.8 million, with an adjusted EBITDA margin of 47.5%, up from 40.6% in the prior quarter and also ahead of market expectations. Based on Morgan Stanley's financial model, the company's third-quarter adjusted earnings per share came in at $0.31.
However, Morgan Stanley noted that Nebius third-quarter revenue included $325 million in non-recurring income related to its asset-light operating model, representing roughly one-third of total quarterly revenue. Therefore, despite the company's strong third-quarter financial performance, investors still need to monitor the growth trajectory of its recurring cloud computing revenue.
Morgan Stanley analysts Ryan Lountzis and Adam Wood pointed out that the positive signals from Nebius's earnings are primarily concentrated in three areas: AI compute demand, pricing power, and financing arrangements. First, the tight supply-demand dynamics in the AI compute market continue to drive Nebius to raise service prices. The company's third-quarter annual contract value per megawatt (MW) of compute capacity exceeded $25 million, up from $20 million to $25 million in the second quarter. Meanwhile, the average hourly GPU rental price rose more than 20% quarter-over-quarter. Since the beginning of the third quarter, the total value of customer contracts secured by Nebius has exceeded $12 billion. Management stated that the scale of contracts signed by customers is continuously expanding, prices for 2027 compute capacity are still rising, and some customers have even begun seeking to lock in 2028 compute resources. Morgan Stanley believes these metrics indicate that despite growing market concerns about the scale and return on investment in AI infrastructure, Nebius continues to face strong customer demand and is able to secure more favorable commercial terms through higher pricing.
However, data center delivery delays are becoming a major factor constraining Nebius's near-term performance growth. Nebius stated that due to the deferral of multiple third-party colocation data center projects to the first half of 2027, a portion of compute capacity originally planned to come online this year and related revenue will also be pushed back accordingly. Among these, the data center project in Vineland, New Jersey, primarily serving Microsoft (MSFT.US), has become a focal point for the market. It is understood that the project's third-party data center supplier is gradually phasing out certain temporary power facilities while advancing the deployment of Bloom Energy (BE.US) fuel cell power systems. This adjustment has delayed a portion of the compute capacity originally scheduled for delivery to Microsoft this year. Nebius currently expects to complete delivery of more than 50% of the capacity under its compute contract with Microsoft by the end of 2026, with the remaining portion planned for delivery in the second quarter of 2027.
Affected by these factors, Nebius revised its full-year 2026 revenue guidance from the previous $3.0 billion to $3.4 billion range to $3.0 billion to $3.2 billion, lowering the upper end of the guidance by $200 million. At the same time, the company expects to achieve more than $7 billion in annualized recurring revenue (ARR) by February 2027, compared to its previous target of $7 billion to $9 billion in ARR by the end of 2026. Morgan Stanley believes that although the related revenue is primarily deferred due to changes in compute deployment timing rather than weakening customer demand, recent project delivery delays highlight the uncertainty surrounding whether Nebius can convert its contracted compute capacity into actual revenue in a timely manner amid constrained supplies of data centers, power, and other infrastructure.
Despite the impact on near-term delivery progress, Nebius management is maintaining its long-term compute expansion targets unchanged. Currently, Nebius has contracted over 4 gigawatts (GW) of power capacity, and the company still expects to increase this figure to 5 GW by the end of 2026, with plans to add more than 1 GW of operational capacity in 2027. To achieve this goal, Nebius recently announced multiple new data center projects and expansion plans, including adding 300 MW of capacity in Missouri, bringing the total contracted project capacity in the state to 1.1 GW; advancing a 100 MW multi-campus AI data center project in Alberta, Canada; and adding a 50 MW third-party colocation data center project in South Carolina. Management noted that as more compute capacity comes from the company's own data centers in the future, Nebius will be better able to control project construction and delivery timelines, thereby reducing its reliance on third-party data center suppliers.
Beyond compute deployment progress, Nebius's financing plans to support large-scale business expansion are another key highlight of this earnings report. Nebius expects capital expenditures to reach $40 billion to $45 billion in 2027. Of this, approximately 75% to 85% of funding needs are expected to be met through customer prepayments and asset-backed financing related to contracts with existing investment-grade-rated customers. The company estimates that customer prepayments will reach $17 billion to $20 billion in 2027, and this amount is not a ceiling. Notably, customer prepayments from newly signed contracts in the third quarter already cover more than 100% of the capital expenditure needs for the related projects, compared to only 50% to 60% in the second quarter. Management stated that this trend has continued into the fourth quarter. Morgan Stanley believes that customers' willingness to provide a higher proportion of prepayments reflects, on one hand, the urgent need of large technology companies to lock in future AI compute resources, and on the other hand, helps Nebius reduce its reliance on external financing during business expansion.
Nevertheless, even if existing financing arrangements can cover most capital expenditures, Nebius will still need to raise additional funds for future data center construction. Given recent changes in credit markets and the company's massive investment scale over the coming years, financing costs and the stability of financing channels will remain factors that investors need to closely monitor.
Based on the latest earnings report and compute deployment plans, Morgan Stanley adjusted its financial forecasts for Nebius over the coming years. The firm lowered its 2026 revenue estimate for Nebius from $3.389 billion to $3.050 billion, a reduction of 10%; raised its 2027 revenue estimate from $10.926 billion to $12.025 billion, an increase of 10.1%; and raised its 2028 revenue estimate from $19.059 billion to $21.018 billion. On the profitability side, Morgan Stanley expects Nebius's adjusted EBITDA to grow from $1.220 billion in 2026 to $6.921 billion in 2027, and further to $13.348 billion in 2028. Over the same period, adjusted EBITDA margins are projected to reach 40%, 57.6%, and 63.5%, respectively.
However, with rising capital expenditures and financing costs, Morgan Stanley expects Nebius to continue facing significant cash flow pressure in the coming years. The firm forecasts free cash flow of negative $21.141 billion, negative $25.113 billion, and negative $27.718 billion for 2026, 2027, and 2028, respectively. On valuation, Morgan Stanley maintained its $144 price target for Nebius, based on the company's 2028 EBITDA forecast of approximately $13.3 billion, applying a 6x enterprise value-to-EBITDA (EV/EBITDA) multiple, and factoring in the net debt level at the end of 2027. The firm noted that although Nebius's vertically integrated AI cloud computing platform has gained recognition from large customers, and its lower total cost of ownership and software monetization potential are expected to drive long-term margin and free cash flow improvement, its valuation multiple should be below the software industry average given the capital-intensive nature of its business. In a bull case, if Nebius successfully brings more than 5 GW of power capacity into operation by the end of 2030, further expands its customer base, and enhances profitability through cost advantages and software monetization, Morgan Stanley believes the stock could reach $400. Conversely, if AI compute supply and demand gradually balance, competition among major cloud computing service providers intensifies, and data center delivery difficulties exceed expectations, the stock's valuation in a bear case could drop to $70.
Morgan Stanley believes that Nebius's current customer demand and pricing trends remain encouraging, but in an environment of constrained compute infrastructure supply, whether the company can complete large-scale data center construction on time, convert contracted capacity into actual revenue, and secure sustained financing at reasonable costs will be the key factors determining its future performance and valuation.
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