At first glance, it's challenging to maintain a bearish stance on Nebius' second-quarter financial performance: revenue skyrocketed 625% year-over-year (106% quarter-over-quarter), with notable improvements on the bottom line—the core AI infrastructure business achieved EBITDA profitability ahead of management's previous expectations.

One-time gains from investments and discontinued operations boosted earnings per share (EPS), explaining why Seeking Alpha showed significant EPS outperformance versus expectations.

Given the company's business cycle, Annual Recurring Revenue (ARR) remains the key metric to monitor. This figure grew from $249 million in March to approximately $430 million by the end of June, prompting management to raise full-year ARR guidance to $900-1,100 million (previously $750-1,000 million). The midpoint of the new guidance represents an 8.57% increase from prior expectations—a substantial improvement.

Meanwhile, revenue guidance for both the core business and overall group remained unchanged at $400-600 million and $450-630 million respectively. Management noted during the Q2 conference call that deployment of NVIDIA's new Blackwell GPUs is primarily concentrated in Q4, resulting in a temporarily lower conversion rate from ARR to actual revenue. This means while the company continues signing new contracts to drive ARR growth, new capacity won't be fully deployed until FY2026.

Nevertheless, analysts have quickly revised upward their multi-year projections, forecasting revenue growth rates of 382.9% and 158.23% for FY2025 and FY2026 respectively.

Note: Revenue expectation changes within 3-6 months were intentionally excluded, as market consensus several months ago targeted Yandex rather than Nebius, making it irrelevant to this discussion.

Nebius plans to achieve 220 megawatts of connected power by the end of FY2025 and reach 1 gigawatt by the end of FY2026. This roadmap includes constructing/operating large new sites in the United States and significantly expanding capacity in Finland, the UK, and Israel. Demand from hyperscale enterprises and frontier AI labs appears sufficient to support these investments, though capital expenditure for 2025 alone reaches $2 billion. While this figure may seem modest in an era where NVIDIA's market cap has surpassed $4 trillion (with other giants following suit), it represents a massive investment relative to Nebius' scale.

Although Nebius is actively onboarding enterprise giants like Shopify, Cloudflare, and Prosus as customers—demonstrating that its end market extends well beyond AI startups or mega-tech companies—the market may have already fully digested management's medium-term sales targets.

Market expectations for FY2025 revenue stand at $567.41 million, meaning Nebius would need to generate approximately $411.41 million in the second half of 2025 to meet this target. Based on recent ARR conversion rates, this goal may prove challenging to achieve.

Nebius' recent inclusion in the prominent Wedbush IVES AI 30 index could fuel a rally, but may also add another layer of premium to already elevated forward valuations. Nebius currently trades at 11.6x FY2026 price-to-sales ratio, and if current revenue consensus proves accurate, its potential upside will be significantly smaller than in the previous 1-2 quarters.

Of course, the price-to-sales ratio could reach 15x by the end of 2026, and if revenue consensus remains accurate, Nebius Group's market capitalization could reach approximately $22.05 billion over the next 12-18 months, representing potential upside of 50%.

However, with capital expenditure running high and ARR-to-actual revenue conversion rates declining, risks are mounting. Therefore, the market may provide better entry opportunities for new investors.

In summary, Nebius remains worth watching favorably. However, it's not advisable to increase positions currently, as the stock appears somewhat crowded, with valuations looking fairly full even from a forward-looking perspective. Both its Q2 performance and management execution deserve praise. CEO Arkady Volozh is an exceptional entrepreneur who has proven his capabilities at Yandex and continues to excel at Nebius Group.