Nebius Moves To The Big Leagues

The $17.4Bn to $19.4Bn Nebius – Microsoft Deal

NBIS ($96)

This is a tremendous deal for Nebius.

My investment thesis for Nebius was based on its technical/engineering strengths as a medium sized Neocloud provider democratizing AI infrastructure for medium sized businesses who did not want or need to pay exorbitant fees to AWS or the other hyperscalers. Prior to this deal, its biggest customer was Shopify and it was well on its way to expanding its reach to companies at, or below Shopify’s size.

Nebius' competitive advantages: Its biggest strengths lie in its full software stack, honed by decades of engineering talent from the ex Yandex team, instead of being a brute provider of GPU‘s in scale like Coreweave, which meant that it had the competitive advantage of not being sucked into lower pricing from just renting out GPUs. It could command a higher price and margin than other Neocloud providers, by focusing more on providing a platform and a superior stack of solutions, plus its customers were supposed to be smaller, giving it more bargaining power. Its second competitive advantage is its strategic relationship with Nvidia, which allows it to commit and guarantee computing power, the way it did with Microsoft. It has the GPUs and the datacenter infrastructure to ensure that there are no supply constraints or bottlenecks.

Excellent Return On Investment: Prior to this deal, its estimated sales growth was $0.6Bn in 2025, growing to $9Bn by 2030, and my target was 8X sales or a market cap of $72Bn, which was about 5x the market cap of $15Bn it was selling at till yesterday – so an almost 5x return over 5 years or 37% per year. Pretty hefty.

Even better ROI: A deal of $18Bn at mid-point clearly changes these estimates and I’m conservatively forecasting the six year deal adds at least $2Bn to revenue each year. And of course, they will get growth from other clients, a massive deal like this gives them even more cachet – my revised sales target for 2030 is $13.5Bn, valuing Nebius at 10x sales = $135Bn. CEO, Arkady Volozh calls this just the beginning, and so far he has walked the talk. At $135Bn we could be looking at almost 7x the current market cap of $22.6Bn (at a price of$95), or a return of 42% per year.

Need to raise capital: They will need to raise at least $3-5Bn in the next 2-3 years from both debt and equity, to play in the majors, but what’s also amazing is that they are financing this with Microsoft’s cash and credit, which means the dilution/interest payments will not be that high. Nebius still comes out way ahead with another 30% increase in share count, if needed at this price. Coreweave has $7.5 billion in long-term debt with about $7 billion in sales in 2025 with around $30 billion worth of contracts, and their growth trajectory confirms that capital raises are absolutely necessary for Neoclouds to thrive.

Adding more shares: I was very content to hold and even sold off some in the mid-sixties after getting 2.6x my purchase price of $23, but now I think the stock is still worth buying even though it has shot up 45% in a day, considering where this company could go in the next five years. This deal actually validates my original thesis and I have no qualms about pyramiding (adding smaller quantities) to my holding.
To be sure, this increases the risks and challenges, namely execution, reduction in AI demand, enhanced competition, and dilution, but I think the risks are worth it.