Nebius (NBIS) Resurrection Is It A Buy Now?

$NEBIUS(NBIS)$

Nebius (NB) stock is among the fastest-growing AI companies right now. If you know of a company growing faster, feel free to share it in the comments, because as far as I can see, this one is leading the charge. Their growth is impressive—nearly 9x year-over-year, from $5 million to $43 million. In this video, we’ll explore what’s driving this remarkable growth, where the company could be headed in the future, and my thoughts on its valuation. Personally, I think it’s a bit too risky for me at this stage, as I’d like to see more proof before considering an investment. That said, there’s definitely potential for continued explosive growth in the years to come. Let’s dive in and understand what’s fueling this success.

First, it's important to know that Nebius’s largest shareholder is Lastar Trust, which also controls the majority of the voting power. Lastar Trust is a family trust of Arati Volos, the company’s founder and CEO. Volos previously founded Yandex, one of Russia's biggest tech companies, once valued in the tens of billions. Nebius, in a way, grew out of Yandex, making it an interesting development.

After Russia invaded Ukraine, Volos made a public statement condemning the invasion as barbaric, and soon after, he left Russia for Israel and Europe. Russian President Putin responded by calling him a "talented businessman" and wishing him good health. This phrasing was a little ominous, as it’s often a veiled remark before something bad happens to wealthy individuals in Russia—like those who’ve mysteriously fallen out of windows, a troubling trend for Russian executives. Volos, understanding the risks, hired a security team, even though he was no longer in Russia.

Following this, Yandex sold its Russian assets for several billion dollars and is no longer a Russian company. Now, Nebius operates with a leaner structure—some remaining assets, like a data center in Finland, and a team of several hundred engineers focused on AI. They are also building AI infrastructure, attracting investment from notable sources, including $700 million from entities like Nvidia, the maker of cutting-edge chips.

Today, Nebius is based in Amsterdam, with research hubs across Israel, North America, and Europe, and is listed on NASDAQ with billions in cash on the balance sheet. The core of their business is focused on AI-centric cloud infrastructure, making this a complex but promising investment thesis.

Nebius has a diverse portfolio of interests beyond just GPUs. They’re also a data partner for companies developing various models, involved in autonomous driving through their Avide division, which focuses on self-driving and delivery robots. They hold a 28% stake in ClickHouse, a database management software, and have an educational technology platform aimed at reskilling individuals in a rapidly changing job market due to the AI revolution. While these are important parts of the business, the majority of Nebius’s revenue comes from their core GPU-as-a-service offering.

Currently, the company operates with 14,000 GPUs and plans to scale this to tens of thousands. Their goal is to reach roughly a billion dollars in annual recurring revenue by next year. With substantial cash reserves and access to capital markets—likely through issuing more stock—they have room to grow. Additionally, their stake in ClickHouse could be worth around $500 million, adding further value to their portfolio.

When we look at Nebius’s business model, they aim to provide GPUs as a service, which operates similarly to a capital-intensive leasing business. They purchase the GPUs and lease them out to customers who either can’t afford or can’t access the hardware themselves. By 2030, they predict this market will be worth $260 billion, growing at over 30% annually, and they aim to be a key player in providing this critical service.

One competitive advantage they see is cost efficiency. Nebius believes they can achieve a 20-25% cost advantage per GPU hour by customizing their servers and data centers, giving them an edge over competitors. This could be a major differentiator in the capital-intensive GPU business, positioning them for long-term success.

To reach their goals, Nebius is planning to multiply their GPU infrastructure 4 to 6 times over the next year, which should drive their annual recurring revenue from under $200 million to nearly $1 billion by year-end. In the future, they expect to generate billions of dollars in revenue from GPUs-as-a-service. However, being capital-intensive means a significant cash burn, which is one of their key challenges. While revenues are expected to grow exponentially, so will their capital expenditures, which are estimated to range between $600 million and $1.5 billion next year. This will result in a cash burn of hundreds of millions, if not billions, of dollars as they continue investing in their GPU infrastructure.

So, what are my thoughts on NBIA stock? First off, as always, this isn’t financial advice. The management alignment also stands out, which I always like to see. Nebius—there’s a lot to like. I’m excited by their work with autonomous vehicles, their Uber partnership, and their delivery robots. These are all cool developments, and they’re clearly tapping into a massive growth market with GPUs-as-a-service. The market for this is expected to grow from $33 billion to over $260 billion, and if they can successfully lease out GPUs, they’ll be able to generate long-term, recurring revenue, which is a solid business model.

That said, let’s run this through my investment checklist because, in my opinion, over 90% of companies fail, and Nebius could be one of them. So, here’s the breakdown:

Management Alignment:

I love what I see here. This is a solid 10/10 in terms of alignment. You’ve got a founder with significant skin in the game, and they’ve done it before. The founder, Arati Volos, previously built Yandex, a highly successful company, and now they’re applying those lessons to Nebius. That track record increases the odds of success. Plus, they know how to build out efficient data centers, which is crucial for their business.

Competitive Advantage:

Here’s where things get tricky. Nebius claims a cost advantage in relation to hyperscalers like Google, Amazon, and Microsoft, as well as large private clouds like Meta and Tesla. But, personally, I’m not sure that Nebius can beat out these giants, who generate tens of billions in free cash flow. Microsoft, for instance, generates more in a few weeks than Nebius has on its entire balance sheet. I just find it hard to believe that Nebius can outscale these massive players with their deep pockets and established infrastructure.

Cost Disadvantage:

Nebius may have a higher cost structure because they’re purchasing GPUs at a smaller scale compared to the hyperscalers. The idea that they can customize their servers and data centers to gain a 20-25% cost advantage seems tough to believe, especially when companies like Amazon, Microsoft, and Google are already optimizing at massive scale.

Valuation:

We’ll get to that in a second, but it’s worth noting the obvious growth potential. Nebius is aiming to capture a piece of that $260 billion market for GPUs-as-a-service, which is incredibly appealing. So, looking at the valuation—Nebius is currently priced at around $32 per share, with a market cap of roughly $7.5 billion. They do have over $2 billion in cash, but I wouldn’t count on that to offset their future cash burn. That cash will mostly go toward buying more GPUs from Nvidia, and they’ve already made that clear.

The big question is: Can Nebius generate enough annual recurring revenue (ARR) from their GPU leasing to justify this valuation? They expect to hit $1 billion in ARR by the end of next year, but with massive capital expenditures ahead, it’s a gamble. In essence, Nebius is making a big bet on AI infrastructure, but it’s still too early for me to say with confidence that they have the competitive advantage to drive long-term returns.

Conclusion

For me, the valuation is hard to stomach, especially when you factor in the heavy cash burn and the potential for larger players to crush Nebius on price and scale. However, I do think it’s possible Nebius could grow significantly in the future if their bet on AI pans out.

So, while I like the founder’s track record and the company’s direction, it’s just too early for me to say "yes, they’ll win." I need more evidence to believe that their cost advantage and infrastructure will truly outcompete the hyperscalers. If you have a different perspective, I’d love to hear it in the comments below.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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