Investment bank D.A. Davidson has adopted a more cautious view on Nebius Group and CoreWeave, downgrading their outlooks while maintaining a positive long-term perspective on the artificial intelligence cloud computing sector. Analyst Gil Luria noted that although both companies are well-positioned to benefit from the surging demand for AI computational power, their current market valuations and operational risks limit immediate upside potential.
In a research note published on Monday, D.A. Davidson initiated coverage on Nebius with a 'Neutral' rating and set a price target of $250. This follows a year in which the company's stock saw substantial gains. The firm praised Nebius for its effective execution, disciplined capital management, and diversified approach to AI cloud services, calling it 'the best executing public AI cloud.'
Nebius’ balanced customer strategy and healthier balance sheet are notable in a competitive market. With minimal net debt, the company has flexibility for future expansion, bolstered by ownership of valuable assets such as Avride and ClickHouse. Financial forecasts indicate a significant revenue boost for Nebius, with projections suggesting growth from approximately $534 million in 2025 to $3.36 billion in 2026, eventually exceeding $10.6 billion by 2027. However, the brokerage warned that Nebius trades at about a 30% premium to its backlog, which limits short-term appreciation potential despite its strong fundamentals.
In contrast, CoreWeave also received a 'Neutral' rating from Davidson, with its price target slashed from $175 to $100. While the firm recognized CoreWeave's growing importance in the AI infrastructure ecosystem, concerns about its profitability and reliance on debt were raised, especially in light of recent insider selling. The company has worked to reduce customer concentration risks by expanding its partnerships beyond major investors like NVIDIA and Microsoft to include OpenAI and Meta.
Despite these improvements, CoreWeave remains one of the least profitable AI cloud providers, with adjusted EBIT margins around 1% based on an annualized revenue rate of $8 billion. Rising memory and infrastructure costs present additional risks to margins, particularly since long-term customer contracts may not adequately shield against future price increases in components. Revenue forecasts for CoreWeave project nearly $13 billion in 2026 and over $25 billion in 2027, but the outlook is clouded by significant leverage.
CoreWeave's blended borrowing costs currently exceed 9%, raising doubts about the firm's long-term returns. Given these risks, Davidson believes it is justified for CoreWeave to trade at a discount compared to Nebius when evaluating backlog valuation metrics. As the AI infrastructure market continues to evolve, operational efficiency and financial health will be critical for both companies as they navigate the complexities of this rapidly growing sector.
