Quick Idea: Nebius Group N.V. (NBIS) Stock Analysis
An under-covered AI Infrastructure company, supplying compute in a market with seemingly limitless demand.
Disclosure: At the time of writing, I have no position in: NBIS, but am planning to take one. I may add, reduce, or sell my position without notice. This write-up is strictly informative, includes my opinions and does not constitute as financial advice. Please do your own due diligence.
What I’m Drawn To:
Clean balance sheet: $2.3B USD in cash (as of Sept. 30, ‘24), $0 debt ($2.0B EV)
Exposure to AI compute trends, without the strong US-markets multiple applied / growth baked-in
An experienced CEO, that co-founded and created the “Google of Russia”, who has forgone the assets, listings and ties to Russia
Recurring Revenue Potential: Projected $500M - $1B ARR in 2025 (currently ~$170-$190M in Q4 ‘24)
CEO’s deep history as a large client / working with Nvidia and CEO, Jensen Huang to provide GPU capacity
Experienced team of ~400 engineers with backgrounds in AI, ML or Cloud engineering (many of which have been with the company since its origin)
The cost-friendly power & cooling benefits of data center buildout in Finland
Lesser infrastructure competitors seeking to service the European hyper-scalers and cloud developers
Pre-Mortem / Associated Risks:
The uncertainty of future demand for AI compute & GPU as a service, as we may or may not be in the early stages of an AI cycle
The potential over-building of compute infrastructure, as we uncover fewer business use-cases that are deemed as worthy of investment (by corporations)
The capital intensity of land, power, infrastructure buildout and maintenance CapEx + depreciation associated with data centers
Questions about the economics of these services, given NBIS’ largest competitors are Trillion-dollar Cloud Service Providers (GOOG, AMZN, MSFT)
Power limitations and local government intervention in supplying consistent energy to their data centers
The market failing to award an “AI-like” multiple on sales / EBITDA / FCF, given the historical Russian overhang
Dual class-share structure, concerns over the CEO owning class A shares (although I believe his preferred shares are deserved)
Overall market sentiment changing, to not rewarding / accommodating hyper-growth companies that lack earnings / FCF
*Credit to Brian Langis for finding NBIS - at least where I uncovered it… you can find his WordPress site here !!
Brief Background:
Nebius Group N.V. is a Netherlands based holding company that has been public since May 2011. Originally called “Yandex N.V.” was HQ’d in Moscow and listed on the Moscow Stock Exchange. Trading volume was halted in February 2022, in response to the Russia-Ukraine war. After appealing the de-listing from the NASDAQ, the CEO, Arkady Volozh would sell the Russian assets for: ~$2.8B USD in cash (see announcement). For context, CEO, Arkady Volozh was not born in Russia, but rather in Kazakstan. I address this point, as it’s likely the market will view this as an overhang, acting as an inhibitor for re-rating.
Additionally, on July 10th, 2024, NBIS delisted their Class A shares (on the Moscow Stock Exchange), creating a more shareholder friendly capital structure. After distancing themselves from their Russian past, they moved their HQ to: Amsterdam, hired a Netherlands-based leadership team, rebranded as, “Nebius Group N.V.” and gained approval to continue trading on the Nasdaq, as of October 21st, 2024. Today, Nebius is building an international presence, seen below:
Business Overview:
NBIS business segments encompass four core categories, however my focus will revolve around the GPU as a service / AI infrastructure component.
Main Business: AI Infrastructure:
Offer GPU clusters & data center access to hyper-scalers seeking to train AI, LLM’s, or cloud services for devs
Own a Finland-based data center with 14,000 GPU’s ready, with goals to scale to 20,000 by end of 2024
Finland is a great location for a data center, given its cold climate, access to inexpensive power, and established fiber infrastructure
They expect to 3x Finland power capacity to: 75 MW by end of 2025 (and enable up to: 60,000 GPU’s at capacity - with a targeted ARR of $1B USD at scale)
They have a co-location cluster at a Paris data center
They’re developing a cluster in Kansas City, USA that management believes will be ready in early 2025 (GPU capacity still unknown)
Management is projecting a CapEx investment of $600M - $1.5B USD in 2025 for enhanced buildout and operations (includes CapEx in other revenue segments)
Toloka: AI Training:
The 2nd largest revenue source for NBIS, acting as a cross-sell opportunity for their AI Infrastructure and compute segment
Q3 ‘24 gross margins reported at: ~high 40% - low 50% range, where growing scaled efficiency will likely enhance segment margins
Greater than 85% of segment revenue was stemmed from generative AI use-cases (which grew fourfold YoY)
AvRide: Autonomous Driving:
The CEO has described this segment as one of the top 5 solutions for autonomous driving globally
Currently, they have a multi-year contract with Uber for use in Austin, Texas and South Korea for un-man’d robot or autonomous driving delivery
CEO of AvRide, Dmitry Polischuk recently said: “We plan to expand the total fleet of Avride robots operating within Uber Eats to hundreds in 2025, followed by the launch of our robotaxi service.” Source: link
Although Interesting, I still see this as a “moonshot project”, that may prove to be be a distraction in focusing on AI investment
TripleTen: EduTech Platform:
Platform for growing skillsets for specific careers in tech… grew revenue threefold YoY (unknown at which $ scale)
Bookings have grown threefold YoY across predominantly US and Latin America
Also promising, but I still view this as “optionality”on top of the AI Infrastructure business
Extra: Clickhouse Stake: 28% of Company
Own a 28% minority stake of Clickhouse, an open-source database management platform for reports of real-time SQL queries
Based on October 2021 Series B valuation, this stake is worth ~$2 Billion USD
Yet another source of optionality for shareholders, as I don’t foresee this being value accretive any time soon
Personal Analysis / Thoughts:
Although there’s early-stage potential, NBIS is a rather speculative investment with some immature business segments today. I believe there are many risks involved in execution, and being a shareholder is a reflection of faith in the experienced CEO, and his management team. Given the “generous” backdrop for AI builders, it’s very rare to find a public company priced this conservatively in 2024. With $2.3B USD in dry powder ready for investment in the next two years, NBIS is better positioned for success than many public market names like: Applied Digital Corp. (APLD). Capital investment is expected to be severe in order to meet customer demand in their three data centers today. Not to mention, they will be expanding to new locations and must invest in maintaining their facilities. However, if demand for compute resources remains even stagnant from what we see today, I think NBIS is positioned to be a big winner in 2025.
Another way of thinking about NBIS…
Instead of trying to forecast ARR in 2025 or Adjusted EBITDA breakeven (which leadership thinks will happen by end of 2025), NBIS looks to be a big beneficiary of price discovery, enhanced media coverage, and the recent re-listing of shares. Execution aside, it’s easy to see how, at worst, NBIS could be a great trade based on sentiment as infrastructure & compute are so in-demand.
One similar name, privately owned CoreWeave is seeking a potential 2025 IPO. According to Verdict , they were recently valued at a $35B public market valuation, with an estimated end of year sales of: $2.3B USD, trading a little over 15x sales.
One problem when assessing forward alpha, is that there’s not many public market comp’s available…
APLD trades at a fwd P/S of 9x (U.S. data center + compute pure-play)
CORZ trades at a fwd P/S of ~10x (more of a digital mining operation + mining for 3rd parties)
IREN trades at fwd P/S of ~4x (an Australian digital mining play + data center / GPU’s for High Performance Computing (HPC) / Cloud services
DBRG trades at fwd P/S of ~9x (asset manager for digital infrastructure, data center included)
However, none of the above have the flexibility found with NBIS’ clean balance sheet.
Although we have to make some assumptions based on demand, if NBIS is able to execute at the bottom range of $500M ARR by end of 2025, and the market rewards them a price/sales multiple of 3x, you’re left with a Market cap of: $1.5B. If they can produce ~$1B USD in 2025, with a 3x P/S, you have a $3B market cap. Assuming they run through the high CapEx range of $1.5B USD, they would still have a cash balance of: $800M USD in 2026, meaning that dilution to shareholders would be rather minimal. As a cherry on top, they have an ownership stake in Clickhouse, worth about ~$2B USD. Although I’m not a fan of valuing securities based on Sum-Of-The-Parts, it’s easy to see how an infrastructure & compute provider growing 300% - 600% in the next twelve months is rather cheap on a forward basis.
In conclusion, an investment in unprofitable, hyper growth companies like NBIS would be unrewarding if overall market sentiment becomes unfavorable toward AI infrastructure / compute providers. As it stands, there is no indication that demand has plateau’d, and Mr. Market is not offering exposure to this theme as fairly priced as Nebius shares are. As a result, I will be taking an initial position, as I believe it will be alpha-accretive simply as a sentiment trade. If coverage grows, and they begin to execute, it may become a more “investable idea”, but as it stands, Nebius is still a speculative story.
Additional Resources:
Brian Langis Wordpress: Link
Lake Cornelia Research Management (X posts): Link
Investor Presentation (Oct ‘24): Link
3rd Quarter ‘24 Results: Link
Kansas City Cluster News: Link
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God bless.