The AI infrastructure buildout has been expensive, and Nvidia (NASDAQ: NVDA) CEO Jensen Huang recently put a price on it. He estimated at the G20 Summit that it costs between $50 billion and $60 billion to build a 1-gigawatt facility.
These facilities will become vital for the AI build-out. They make it easier to scale agentic AI, chatbots, and upcoming physical AI, which includes humanoid robots and autonomous vehicles.
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This is obviously good news for neocloud providers like Nebius (NASDAQ: NBIS), which build these data centers. However, there are a few key catalysts that investors may not be anticipating.
When Nebius reported Q2 earnings, it told investors that its revenue jumped by 454% year-over-year to $582 million. Annual recurring revenue reached $3 billion, and it's aiming for $7 billion to $9 billion in annual recurring revenue by the end of the year.
While annual recurring revenue is a good gauge for determining a stock's fair price, investors should also consider the multigigawatt pipeline. Since Huang set $50 billion to $60 billion as the range for a 1-gigawatt facility, Nebius' projected five gigawatts of contracted power by the end of 2026 can be worth up to $300 billion when all of the facilities are finished.
That doesn't mean Nebius should immediately have a $300 billion market cap. However, the data centers offer significant value that goes well beyond the annual recurring revenue that they can generate.
Neoclouds have a compelling opportunity, but high capital costs have been the major weakness. Huang pegging the cost of a 1-gigawatt facility at $50 billion to $60 billion can actually solve that problem, especially if the value of these facilities continues to climb.
Neoclouds like Nebius have been taking customer prepayments to help fund these builds. If people place a higher valuation on a 1-gigawatt facility, Nebius can ask for additional money up front, which goes toward site construction.
Nebius told investors in its Q2 shareholder letter that the annual contract value of a single megawatt stood at $12 million at the start of the year. Q2 deals have exceeded $20 million per year, and the company has been negotiating short-term Q3 deals that are above $40 million per megawatt.
It's reached the point where 50% to 60% of Nebius' capital expenditures have been self-financed by prepayments. That's part of the reason Nebius ended the quarter with an $8 billion cash position. As the value of megawatts and data centers increases, Nebius can get even more prepayments that reduce the necessity of shareholder dilution.
Although prepayments are an excellent funding source, they haven't been enough for Nebius and other neoclouds. However, the data centers themselves can cover the gap if lenders are willing to let neoclouds borrow against them.
Iren (NASDAQ: IREN) CEO Dan Roberts said that prepayments can keep up with most of the neocloud's capital expenditures. However, the company also said that its entire data center portfolio remains unencumbered. Iren can theoretically raise billions of dollars just by taking out loans against its facilities, and the same applies to Nebius. GPU-backed financing has been the popular route for both of these companies.
There's no need to finance the data centers if prepayments, GPU-backed financing, and realized revenue are enough to keep up with expenses. However, it's an extra resource that will make it easier to fund additional projects.
One of the bearish points for neoclouds is how they are going to raise all of the necessary capital for the data center buildouts. A focus on prepayments and GPU-backed financing has mostly answered that question, but data center financing serves as an extra funding source if needed.
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Marc Guberti has positions in Iren. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Jensen Huang Just Said a 1-Gigawatt Facility Is Worth $50 Billion to $60 Billion. Here's What That Means for Neocloud Stocks Like Nebius. was originally published by The Motley Fool
