Nikesh Arora warns neoclouds will lose pricing power when GPU supply catches up but singles out Nebius as a durable neoscaler.
Nebius has over $40 billion in contracted revenue from Microsoft and Meta, with $3 billion ARR and a 50% adjusted EBITDA margin.
Nebius closed a $5.75 billion convertible-note offering to fund expansion, making valuation discipline essential despite the compelling neoscaler thesis.
Act now: the analyst who called NVIDIA in 2010 just named his top 10 AI stocks — and Palo Alto Networks didn't make the cut. Grab the names FREE today.
The AI infrastructure boom is creating a peculiar investing landscape. Demand for computing power is running ahead of available supply, allowing companies that own GPUs and data-center capacity to command premium prices. Nvidia (NASDAQ:NVDA) said its neocloud partners are expected to reach 8 gigawatts of installed capacity by the end of 2026, up from 3 gigawatts at the end of 2025.
Amal Kamal 17 / Shutterstock.com
Yet Palo Alto Networks (NASDAQ:PANW) CEO Nikesh Arora sees a reckoning coming when supply catches up. His warning is stark: "In two years from now you will be able to buy a neocloud for less than they raise at today."
But Arora doesn't put every AI cloud company in the same bucket. He specifically sees Nebius Group (NASDAQ:NBIS) becoming a "neoscaler," along with CoreWeave (NASDAQ:CRWV). That distinction matters for investors deciding whether Nebius is an AI infrastructure bubble candidate or a potential long-term winner.
What Is a Neoscaler?
A neocloud primarily rents scarce GPU capacity. That can be a lucrative business while GPUs, power, and data-center space are constrained. But it also leaves the company vulnerable when competitors add capacity.
Arora's "neoscaler" concept describes something more durable: an AI cloud provider that reaches sufficient scale, locks in major customers, secures power and infrastructure, and adds software capabilities on top of expensive hardware.
Act now: the analyst who called NVIDIA in 2010 just named his top 10 AI stocks — and Palo Alto Networks didn't make the cut. Grab the names FREE today.
Nebius is building toward that model. Its second-quarter shareholder letter showed AI cloud revenue of $575 million, up 514% year over year, while annualized recurring revenue reached $3 billion. More important, its AI cloud business generated a 50% adjusted EBITDA margin in the quarter.
That software layer is important because GPUs depreciate and become obsolete. If all a company does is rent chips, falling rental prices can quickly squeeze returns. Nebius is trying to make its platform more than a warehouse full of GPUs.
The strongest evidence supporting Arora's view is Nebius' contracted demand. The company has signed multibillion-dollar agreements with Microsoft (NASDAQ:MSFT) and Meta Platforms (NASDAQ:META), including a roughly $2.9 billion, five-year Meta agreement. Nebius said in July that it had more than $40 billion of additional contracted revenue from investment-grade customers such as Microsoft and Meta.
It is also securing power and expanding its infrastructure footprint. Nebius raised its contracted power guidance to more than 5 gigawatts and said four large second-quarter deals averaged more than $1 billion each. About 50% to 60% of capital expenditures for some deals can be financed through customer prepayments.
That changes the capital equation. Nebius isn't simply building speculative capacity and hoping customers arrive.
The Risk Is Still Real
Granted, Arora's warning shouldn't be dismissed. Neoclouds remain capital-intensive businesses, and he argues their economics depend on capex and internal rates of return. When supply and demand balance, he says, equity valuations will normalize -- and funding capex through equity works only while markets remain euphoric.
Nebius just closed a $5.75 billion convertible-note offering, including $3.45 billion of notes due in 2030 and $2.3 billion due in 2034. The proceeds will finance data-center expansion, GPUs, and its AI cloud platform. That is a lot of capital to put to work.
But it is also why the distinction between a generic neocloud and a neoscaler matters. Nebius has contracts, power, scale, and an increasingly broad software stack. The company says its platform serves the full AI workload lifecycle, while acquisitions such as Eigen AI and Clarifai are intended to strengthen inference and AI engineering capabilities.
Key Takeaway
In short, Arora's comments aren't a blanket endorsement of Nebius. They're almost the opposite: a warning that investors shouldn't confuse today's GPU scarcity with a permanent competitive advantage.
Nebius, however, has several characteristics that could allow it to survive the normalization Arora expects. Its $3 billion AI-cloud ARR, 50% adjusted EBITDA margin, multibillion-dollar customer contracts, and more than $40 billion of additional contracted revenue give it a foundation most speculative neoclouds lack.
That makes Nebius worth considering for aggressive investors. But after a massive infrastructure buildout and $5.75 billion financing, the stock still demands discipline. The neoscaler thesis is compelling -- investors just shouldn't pay any price for it.
Act now: the analyst who called NVIDIA in 2010 just named his top 10 AI stocks — and Palo Alto Networks didn't make the cut. Grab the names FREE today.
