Crossroads Capital's research report for the month of December 2024, titled, "From Russia with Cash: Nebius Group (NASDAQ:NBIS)".
1) Introduction
Over the past year, the AI boom has led to a shortage of high-power computing and data center resources, driving the rise of new business models like AI-focused cloud services. Thousands of AI startups and other enterprises are spending billions to develop AI solutions with hyperscalers and AI clouds as the foundational infrastructure providers. In the U.S., compute scarcity is so high even hyperscalers such as Microsoft are spending hundreds of millions (almost billions) per annum on these third-party AI clouds, while simultaneously investing in their own infrastructure. Additionally, Nvidia, the leading supplier of AI computing hardware (GPUs), is expanding its customer base and accelerating industry growth by offering preferential deals and capital to these smaller providers, such as CoreWeave, to help them increase their capacity while staying financially sustainable.
Although the AI boom in Europe may be smaller and more constrained than in the U.S., it operates under similar dynamics, with an added focus on the unique value of brownfield data center operations given increased regulatory scrutiny in the EU.
Nebius Group (NBIS) is an emerging AI cloud provider (along with a few other business lines) supporting European AI companies, with operations across Europe and plans to expand into North America. Originally, Nebius was part of Yandex, often referred to as the "Russian Google" due to its strong resemblance to Google in offering search, advertising, cloud, and various digital services within Russia and other formerly Soviet countries. After Russia's invasion of Ukraine in February 2022, Yandex faced significant challenges from the geopolitical fallout, which led to a halt in trading of its shares, its founder being placed on sanctions lists from Western governments and heightened regulatory pressure from Western nations and Russia. These issues forced Yandex to reevaluate its structure and geographic exposure (market and operational locales), particularly as its dependence on Western markets, partnerships, and investors was severely affected.
After an arduous two-year process, Yandex’s founder was removed from sanctions lists in March and the Dutch parent company Yandex NV (YNV) sold its 28% stake in Yandex to a Russian consortium for $5.4 billion in July, receiving $2.8 billion in cash and 162.5 million YNV Class A shares. This move enabled Nebius to continue operating and growing in European markets while distancing itself from Yandex's Russia-based segment.
Now free of Russian ties, Nebius plans to expand beyond a collection of former Yandex assets and into a leading European AI cloud provider. As the company scales its AI infrastructure, it is well-positioned to leverage its experienced engineering team to develop a comprehensive full-stack AI solution, encompassing everything from compute infrastructure to deployment and monitoring. This approach should provide a more defensible competitive advantage, moving beyond the market's concerns about earnings tied to the currently constrained GPU rental market, which could be commoditized in time.
With ~$3 billion in cash (pro forma recent equity raise), a possible ~$1.5 billion for the other divisions, no debt, and only a ~$7.3 billion market cap, NBIS offers a remarkably cheap opportunity to invest in a successful founder and technology team at a critical inflection point in an industry with enough tailwinds to offset concerns on execution risk in their impressive growth plans. At current prices, even assuming a $1 billion cash burn next year, Nebius’s AI cloud business appears to be valued at ~$3.3 billion – or ~3.3x ARR given the high end of management’s “$750-$1,000 million ARR by year-end 2025” guidance, which we believe is highly achievable.
Given its non-core assets and flexible balance sheet, and its management’s track record, Nebius has multiple opportunities (catalysts) to realize value and fuel growth plans in a manner accretive to shareholders. Additionally, the founder’s close relationship with Jensen Huang seems to have secured Nebius greater access to affordable GPUs. This relationship also facilitated Nvidia's equity investment in Nebius during a late 2024 funding round, providing support similar to what CoreWeave has received.
2) Investment Thesis
We recommend investing in NBIS as the company executes its AI growth plans and achieves significant improvement in revenue and earnings, proving that it’s more than a collection of leftover Yandex assets. Additionally, legacy concerns over Russian exposure and share ownership overhangs should fade representing another avenue towards material repricing of the core business.
At Nebius’s current price of ~$31/share, the market values its AI cloud business at ~3.3x ARR, even accounting for a considerable burn rate over the next year against ~$3 billion in cash (pro forma recent equity raise), a minimal $1 billion sale price for Avride (2x invested capital to date), and $500 million for its three other software businesses (Toloka, TripleTen, and a minority interest in ClickHouse).
Concerns over execution of these growth plans, cash burn from investment, and future levels of normalized earnings for AI cloud operations are reasonable but short-sighted, given management’s track record, today’s valuation, and the optionality embedded in Nebius’s two main assets. Furthermore, the company has a well-defined roadmap to scale its AI business, modeled after CoreWeave, which grew from zero to over $2.3 billion in revenue in just a few years. CoreWeave’s rapid success has earned it a premium valuation in private markets, with recent marks at a $23 billion valuation (~$33.5 billion EV) against ~$2.3 billion in estimated 2024 revenue. The company is expected to IPO in 2025 with a $35 billion valuation ($45.5 billion EV). Based on a combination of 2024 figures and the potential valuation for the 2025 IPO, CoreWeave is valued around ~10x EV/Revenue.
If Nebius succeeds in becoming a leading AI cloud provider with a valuation on par with CoreWeave, an investor today gets that 4x+ option at a 45%-65% discount to peers. If only Avride succeeds and is valued at one-third of Waymo’s $45 billion (with the AI cloud business worthless as GPU capacity goes into oversupply), Nebius still has a 2x option for which an investor pays next to nothing.
In fact, in a worst-case scenario, the liquidation value of Nebius’s asset base is estimated at roughly $26.50/share, or only ~15% downside. Given the assets and optionality of the event path for its two main businesses, we believe there is asymmetry in the risk/reward ranging from that 15% downside to 400% or greater upside.
There are several reasons for this current mispricing:
- Investors old and new are absorbing information on an almost entirely new company, post the sale of Russian assets. Yandex is a known entity to investors, the “Russian Google,” even as it lives on in a much smaller Russian-only capacity today. While the company was highly regarded and the biggest non-U.S. purchaser of Nvidia GPUs prior to 2022, Russian geopolitical risks kept many Western investors away. Nebius, essentially the remaining Western businesses of Yandex, is far less known despite many years of solid operations. Yet due to the recent resumption of trading after a two-year suspension, many former long-term Yandex shareholders are now faced with assessing the value of a set of businesses that differs significantly from what they initially invested in. On the other hand, the removal of Russian risks and exposure to two strong, growth-oriented businesses at critical inflection points is attracting new investors. In either case, long-term holders and new investors are in a period of investigation, determining whether the probability of success for the new businesses is appropriately priced in, or even worth taking a position on. This change in share ownership can create a mispricing, and thus an opportunity to invest.
- Entire company is a portfolio of call options, a setup typically mispriced by the market in the near term. Nebius’s significant investment in its AI cloud and Avride businesses effectively positions the company as a portfolio of real options, with both ventures representing new competitive plays built on repurposed legacy assets. The AI cloud business leverages Yandex’s data center infrastructure in Finland, while Avride benefits from the strategic relocation of Russian engineering talent to Austin, Texas in early 2024. With both divisions currently operating at negative EBITDA and cash flow, traditional earnings-based valuations fail to capture Nebius’s intrinsic value. As a result, the market overlooks these embedded growth options: A traditional earnings-based valuation is likely how former Yandex shareholders view the new company, leaving them inclined to exit. Additionally, substantial sunk costs effectively lower the exercise price of realizing future success, an advantage the market does not recognize, failing to apply an adequate premium to these growth options. As a result, Nebius’s current valuation reflects a collection of out-of-the-money call options with significant upside potential and likely a far greater probability of paying off than the market price currently suggests.
- Competitive advantages and earnings potential in the AI business misunderstood and overly discounted at current valuation. At present, many view AI infrastructure as a GPU rental business with high capital intensity, rapid technological advancement/depreciation, little to no competitive differentiation, and therefore low ROIC. Even if these claims were accurate (which they largely are not) and GPU compute were to become commoditized, Nebius possesses several technological advantages that position it as a low-cost provider, rivaling the efficiency of the major hyperscalers. This business niche is clearly still in its early stages, and uncertainty around forecasted earnings is likely driving much of the potential mispricing. However, public investors can draw comparisons to CoreWeave, a business further along the development/growth curve, recently valued at over 10x its ~$2.3 billion in 2024 revenue (up from ~$500 million in 2023). In contrast, Nebius offers an opportunity to invest in a similar core business at just 3.3x ARR – a 45%-65% discount based on the lower end of forward guidance. Moreover, management has additional strategic options that could unlock value, effectively setting a floor under the current share price regardless of future growth trajectories. As for the business itself, we believe that the company is going through two phases: (1) a high capital intensity investment” phase of scaling up the AI infrastructure in a GPU supply-constrained environment, and then (2) a “moat-building” phase, in which it surrounds that infrastructure with comprehensive software tools to create a self-perpetuating Nebius AI ecosystem. Forcing a valuation hypothesis based solely on the current supply-demand imbalance in the AI compute market overlooks Nebius's robust infrastructure advantages and the considerable potential in its strategic vision.
- Capacity growth embedded in guidance heavily discounted despite AI growth and subsequent compute scarcity. AI clouds are becoming a critical addition to the data center market, driven by the distinct demands of AI workloads. Major hyperscalers are increasingly partnering with third-party providers to expand compute capacity, even as they invest heavily in their own infrastructure. For instance, Microsoft has committed $10 billion to CoreWeave through 2030 to secure GPU availability, while Core Scientific reports tight GPU capacity through 2026, with customers funding capital expenditures upfront to accelerate buildouts. These dynamics lend credibility to Nebius’s growth projections and its assertion that AI compute capacity will be quickly absorbed. To ensure near-term utilization, Nebius has aggressively priced its H200 GPUs at under $2.50 per GPU/hour, compared to $6–$7 per GPU hour charged by peers. With this competitive pricing, Nebius’s AI revenue has scaled rapidly, reaching ~$200 million ARR in Q4 2024 – just one quarter behind capex deployment. The company plans to spend ~$1 billion over the next year to more than quadruple GPU capacity, with $400 million invested in Q4 2024 alone.
Also, Nebius is uniquely advantaged by brownfield (i.e. land that has already been developed and/or built on) expansion at its flagship data center in Finland, benefiting from Europe’s greenfield (i.e. land that has not previously been built on or developed) development constraints. Those restrictions likely curtail broader AI data center growth across the region, further solidifying Nebius’s market position and ability to fill its new capacity. Notably, access to Nvidia’s next-generation Blackwell GPUs is critical to its 2025 growth plans, and Nebius’s close ties with Nvidia CEO Jensen Huang position it as one of only three EU AI customers expected to receive Blackwells. In fact, Nebius’s recent equity raise with Nvidia as a participant is a clear indicator that it’s following the CoreWeave playbook. In the current supply-constrained environment, and given the linear relationship between capex and revenue, Nebius is on track to hit ~$1 billion in ARR by year-end 2025. Any new evidence demonstrating its ability to secure this revenue could serve as a positive catalyst for the stock. - Concerns over cash burn rate and possible equity financing ignores massive cash balance and other creative options. Nebius plans to invest approximately $1 billion in GPUs and Avride development over the next year. Given high demand for GPU capacity, the company believes its AI growth is currently limited only by capital constraints. While Nebius’s operations are currently cash-consuming, the company is on track to become EBITDA positive next year, driven by anticipated growth. With a cash balance of ~$3 billion post-equity raise, Nebius is well-positioned to internally fund its growth plans for the coming year, while maintaining a healthy cash reserve. After 2025, the company aims to expand from ~60k GPUs to ~240k over the next few years, requiring approximately $5 billion. Though ambitious, this target is not unreasonable; CoreWeave, for example, grew its revenue from $500 million to over $2 billion in a year, supported by a $2.5 billion investment in 2023. Additionally, CoreWeave raised approximately $9 billion this year, and now has a backlog of roughly $17 billion through 2030, mostly backed by Microsoft. The company is simultaneously building out capacity in the highly coveted U.S. market, with ~35k GPU colocation in Kansas City. Nebius currently has no debt and could lever its balance sheet to finance its growth, if necessary. Again, CoreWeave shows the way – by issuing GPU asset-backed loans to fuel purchasing more GPUs, Nebius could bootstrap its way to 240k GPUs. Alternatively, the company could raise capital by selling Avride (valued at a minimum of $1 billion) or other software businesses (conservatively valued at around $500 million). With the founder holding approximately 13% of the company’s stock, we anticipate a strong focus on the aforementioned options, with equity raises pursued only if they are expected to be accretive within a short timeframe.
- Management underestimated, despite track record and substantive ownership. Arkady Volozh co-founded Yandex in 1997, initially as a search engine. Over the next two decades, he expanded it into various sectors, including machine learning (now artificial intelligence) in 2009 and cloud storage in 2012. Yandex went public on the Nasdaq under the ticker YNDX in 2011 with an $8 billion valuation, eventually growing to around $30 billion by 2021. By then, Arkady’s net worth exceeded $2 billion, positioning him as the head of one of Europe’s most prominent tech companies. However, in 2022, Yandex’s market value declined significantly following the Russian invasion of Ukraine, leading to a suspension of trading in its shares for over two years. This past October, following a rebranding of its remaining assets as Nebius, trading resumed, with Arkady holding 90% of his net worth in NBIS, amounting to a ~13% ownership stake. Opportunities to invest alongside a founder of Arkady’s caliber – who demonstrates exceptional personal commitment and a proven track record of leveraging his company as a platform for bold, innovative ventures – are rare and should not be overlooked by investors.
The largest micro risks to Nebius are execution issues with the data center expansion, the sales pipeline following said buildout, and methods of financing the growth that could be shareholder dilutive. The largest macro risks are the supply/demand dynamics for AI compute and utilization of said data center assets, the overall financial conditions of the market for raising capital, and technological changes that would reduce the value of a GPU-centric industry.
3) Business Analysis
Overview: Assets of the former “Russian Google” coalescing into a formidable AI platform
Yandex was founded in 1997 by Arkady Volozh and Ilya Segalovich, both of whom had backgrounds in technology and computer science. The company started as a search engine project named Arkadia, but this soon evolved into Yandex (which stood for “Yet Another iNDEXer”). The search engine was tailored to the Russian language and its unique syntax, which was not being adequately served by Western search engines like Google or AltaVista at the time.
Over the next 20 years, Yandex expanded into services such as maps, email, and online advertising. Notably, the company started a machine learning operation in 2009 and a cloud storage service in 2012. Yandex Self-Driving Group (SDG) was established in 2016, moving to Austin, TX as Avride in 2024. Yandex Cloud was officially launched in 2018, with its Finnish data center being the company’s prime asset outside of Russia.
Following the Russian invasion of Ukraine in 2022, trading in Yandex was suspended, the founders were subject to sanctions, and employees left Russia in droves. During the next two years, the business’s Russian assets were split off from its Western ones. The Russian assets, Yandex proper, were sold to a Russian consortium for $5.4 billion in mid-2024 as described earlier. Shares in this Western asset group resumed trading in late 2024 under the name Nebius Group NV (NBIS). It consisted of the AI cloud (Nebius), three software assets (Toloka, TripleTen, ClickHouse) and an autonomous driving unit (Avride).
Nebius AI Cloud
Nebius AI is currently a “compute-as-a-service” or AI infrastructure business. The company designs its own servers (outside of Nvidia GPUs) and AI cluster layout in a data center, and then rents GPU capacity to companies developing AI programs and services. Currently, the company has over 40 customers, many of which are AI-native.
The company’s main compute asset is the former Yandex Finnish data center which is being repurposed for AI use cases. Nebius plans to expand capacity in that data center by 3x to ~75 MW, or 60k GPUs, by early 2026. Additionally, the company is running a co-location in Paris with Equinix, and another in Kansas City with Patmos. The Kansas City cluster should start at 5 MW early next year, and then scale to 40 MW, or 35k GPUs, over the next year or two. The Equinix cluster in Paris is capable of ~30 MW, or 25k GPUs, and should be the first in Europe to receive Blackwells.
At present, NBIS is running ~20k GPUs with plans to reach ~60k in 2025 and ~240k in 2027+.
AI Services
Nebius offers not only AI cloud services but is building an AI platform and application layer. These are scalable but in early stages, shown below in purple.
Additionally, Nebius is building Nebius Studio, an API SaaS for open-source models, shown below:
These developing products and services are tailored for the inference market.
Read the full report here by Crossroads Capital.
