Key Points
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Nebius is commanding $40 million to $50 million per megawatt for short-term deals, while TeraWulf signed a big deal with Anthropic valued at roughly $2.4 million per megawatt over 20 years.
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Nebius has higher expenses because it must also buy AI chips, but payback periods have been trending downward.
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Neoclouds can scale their gigawatt capacities faster than colocation providers because they enjoy more lucrative contracts and can borrow against their facilities and chips.
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Hyperscalers need gigawatts of energy to fuel their artificial intelligence ambitions, and there are two key categories of service providers that every investor should know. Neoclouds like Nebius (NASDAQ: NBIS) are the first option, while colocation companies like TeraWulf (NASDAQ: WULF) are an alternative.
The common narrative is that neoclouds are riskier investments but also have a higher ceiling. Neoclouds have more expenses since they also buy AI chips, whereas colocation providers like TeraWulf require tenants to bring their own chips. That business model results in lower capital expenditures and makes it easier for colocation providers to build facilities.
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When you take a closer look, the neocloud formula is far more promising than the colocation model. Here’s why.
Revenue potential is substantially higher for neoclouds
Let’s start with recent deals Nebius and TeraWulf have secured. While Nebius offered flashy press releases about long-term contracts with Microsoft (NASDAQ: MSFT) and Meta Platforms (NASDAQ: META) in the past, it has been a bit more discreet about customers.
Nebius told investors in its Q2 shareholder letter that it’s getting long-term deals at $20 million to $25 million per megawatt. That matters because some hyperscalers require hundreds of megawatts for a small slice of their AI needs. One hundred megawatts at $20 million per megawatt equals $2 billion in annual recurring revenue. Nebius is aiming for a 5-gigawatt pipeline by the end of the year. Short-term deals are being signed at $40 million to $50 million per megawatt.
TeraWulf’s big deal was a 20-year, $19 billion contract with Anthropic for 401 megawatts. That comes to about $2.4 million per megawatt per year. TeraWulf has lower costs since it’s not responsible for AI chips, but that’s a 20-year deal where TeraWulf cannot capitalize on rising megawatt prices. It’s locked into a low-megawatt rate for a long stretch, and if the costs of building and maintaining AI data centers continue to rise, it could squeeze TeraWulf’s margins.
The financing problem is starting to vanish
Some bearish analysts have pointed to high capital expenditures that AI data center providers must pay to build facilities and buy chips. Nebius has higher costs, but financing and lucrative deals have mostly solved this problem.
Nebius told investors in its Q2 shareholder letter that 50% to 60% of its capital expenditures are financed by prepayments. The company can also borrow against its GPUs, knowing it can secure competitive rates and profit on those chips as more contracts materialize.
The company’s payback period has quickly dropped from two to three years to just one year and 10 months. As megawatts get more expensive, the payback period could drop even further. That’s how long it takes for Nebius to generate enough revenue from deals to cover the costs associated with building and maintaining data centers and buying chips.
Once those payback periods are reached, Nebius can start funding its data centers with incoming profits instead of borrowing money. If Nebius continues to borrow capital, it will have an easier time finding competitive rates as it becomes more profitable.
TeraWulf does not have this advantage. It can’t charge $20 million to $50 million per megawatt because it doesn’t have the chips. Even after TeraWulf completes its payback period, it doesn’t have the full stack like Nebius.
Access to more capital makes it easier to obtain more gigawatts
As neoclouds like Nebius continue to sign lucrative deals and shorten payback periods, they will be in a better position than colocation providers like TeraWulf to accumulate more gigawatts.
Fellow neocloud Iren (NASDAQ: IREN) disclosed a 35-gigawatt development pipeline. That doesn’t mean Iren will convert all 35 gigawatts into AI data centers, but colocation companies don’t have the same scaling power to support that type of expansion.
It wouldn’t be shocking if Nebius had a similar development pipeline. Even if Iren secures only 10 additional gigawatts out of the 35, it may be enough to turn Iren into a generational wealth opportunity. The same goes for Nebius.
Iren and Nebius aren’t going to sign deals at $2.4 million per megawatt. In fact, Iren revealed a new long-term deal at $22 million per megawatt in its fiscal 2027 first quarter results. It’s also getting short-term deals at $40 million per megawatt.
Artificial intelligence has already produced generational wealth for some investors. While the AI data center play is hot right now, there is a critical difference between a neocloud and a colocation provider. Neoclouds have much higher ceilings, and the few bearish points continue to be snuffed out with each earnings report.
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Marc Guberti has positions in Iren and has the following options: long May 2027 $20 calls on Iren and long May 2027 $28 calls on Iren. The Motley Fool has positions in and recommends Meta Platforms and Microsoft. The Motley Fool has a disclosure policy.
