Nebius Group (NASDAQ: NBIS) rallied another 15% this morning as investors cheered the firm’s massive $27 billion infrastructure deal with Meta Platforms (NASDAQ: META).
Versus its year-to-date low, NBIS shares are trading up a remarkable 80% at the time of writing.
However, while the market is currently in a “buy-at-any-price” frenzy for AI compute providers – a conventional “Discounted Cash Flow (FCF)” model suggests Nebius stock is “overvalued” at current levels.
But does that warrant aggressive profit-taking on Monday? Let’s find out!
Evaluating fair value for Nebius stock
Our DCF model uses aggressive assumptions to find the fair value of NBIS shares.
This includes management’s ambitious target for $3.2 billion in revenue this year – and a pompous 45% compound annualised growth rate (CAGR) through the end of this decade.
We applied a weighted average cost of capital (WACC) of 12.5% to account for the high CAPEX required to maintain their data center edge.
Even with these optimistic projections – and assuming free cash flow margins scale to healthy 20% as infrastructure matures – the model yields an estimated intrinsic value of nearly $94 only.
With Nebius Group currently trading at about $130, the company is priced at a whopping 38% to its fundamental value, indicating current buyers are paying for growth that may not materialize for years.
The market is currently pricing in a “blue sky” scenario that well exceeds the company’s aggressive guidance.
Today’s price action following Meta deal has pushed the Nebius shares into “momentum territory”, where they’re trading more on the scarcity of AI compute than on current cash flow fundamentals.
Does that mean you should sell NBIS shares today?
While the DCF model signals NBIS stock is overvalued currently, it’s surging nonetheless because investors are paying a “security of supply” premium.
With the META deal today and an earlier agreement with Microsoft, Nebius Group has essentially sold out its capacity for years, making its future revenue “bond-like” in terms of certainty.
Moreover, the $2 billion investment from Nvidia announced last week is seen as a huge de-risking event that lowers the firm’s perceived WACC, which would significantly raise the DCF fair value.
It’s why Wall Street remains bullish as ever on Nebius stock as well.
The consensus rating on NBIS sits at “moderate buy” currently, with the mean target of about $154 indicating potential upside of another 20% from here.
All in all, if you’re a value investor, NBIS’s valuation does indeed look stretched at a price to sales (P/S) multiple of about 54x.
But for a growth investor, believing that the $27 billion agreement with Meta Platforms announced today may just be the first of many, justifies the current $129 price tag on the Amsterdam-based AI infrastructure firm.
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