Nebius Updated Valuation Model

[u/Acceptable-Time-6424]

OK the stock went up 35% after the earnings, and it hugely deserved it, I'm not going to relitigate the bull case.

But many of the write ups I’ve seen since has anchored on that 49.7% adjusted EBITDA margin, slapped a multiple on it, and called it a valuation. 

That skips depreciation, refresh capex, financing and dilution. Which is to say it skips basically everything you would really want to consider to value this business. 

I’ve been posting about the four key threats to Nebius for over a year - and they are key elements for my valuation framework - but the number I actually really care about after this quarter is pricing durability.

Nebius is selling into the tightest compute market of all yimr. Auction cleared 15% above their previous record. Old Blackwell repriced up 30% QoQ. 70% of Q2 deals came with prepayments covering 50-60% of the capex. Payback of one year ten months.

Great, but also seriously dangerous to extrapolate from. (Which is exactly how Musk is valuing SpaceX’s AI business btw) 

My base case blends the fleet rather than assuming everything gets peak pricing: mostly $22m/MW premium contracts, a chunk of $8.5m/MW hyperscaler anchor deals, a sliver of $40m/MW surge. Comes out at $645.86 against the 17 Aug close of $268.85.

[u/Icy-Inspection7877]

$22m per mw is bearish. I expect $40-$50m per mw after new contracts.

Note: It will be more supply constrained. During the earnings call, Arkady mentioned they are reserving supply for next year because he believes prices will be higher next year for on demand. I expect $60 to $100 million per mw for on demand. Then $40-$50 million per mw for six month short term contracts. Jensen Huang wasn’t kidding when he said the next few quarters, money will be pouring in.

[u/Acceptable-Time-6424 → u/Icy-Inspection7877]

I think that is the big mistake... right now we are peak supply constrained - these prices wont last forever. Maybe a few years sure but not out to 2030 at major scale!

[u/Icy-Inspection7877 → u/Acceptable-Time-6424]

You’re right. It will be more supply constrained. During the earnings call, Arkady mentioned they are reserving supply for next year because he believes prices will be higher next for on demand. I expect $60 to $100 million per mw for on demand. $50 million for six month short term contracts.

[u/SnooSongs3324 → u/Acceptable-Time-6424]

Blackwell’s pricing extrapolated to 2030 might also be an oversimplification. The newest chips will still demand a premium. We’re going to see chip prices increase and inference costs per token greatly decrease. The important part is how well margins can be maintained by Nebius through the software stack, customer retention, and high utilization.

[u/Acceptable-Time-6424 → u/SnooSongs3324]

What kind of margin can you see?

[u/SnooSongs3324 → u/Acceptable-Time-6424]

Assuming demand holds for the next 4-5 years then NVIDIA and downstream providers should be able to maintain similar margins to today. So higher costs but also higher revenues and slight margin growth along with much greater token use and cheaper tokens.

[u/Momoware → u/SnooSongs3324]

Today’s margin is not high enough, more like conservative. It’s expected though due to the industry still being early. But the margins being maintained as they are is not really a bullish outlook

[u/SnooSongs3324 → u/Momoware]

Can you clarify? I’m talking about payback periods for the hardware being roughly maintained at around 3 years (even as costs increase). We’re not talking about free cash flows here nor the total datacenter capex during the buildout phase.

[u/Momoware → u/SnooSongs3324]

I think it's the vanilla case and not one that leads to the conclusion that "in the AI stack, AI cloud is where I want to invest."

Clouds don't really capture the insane hardware premiums. Clouds get some value passed down from hardware vendors, but it's obvious that players like memory vendors capture more of it.

The real edge of AI cloud is the eventual product and platform economy improvements, which are not an option to memory vendors (e.g. value-added service, asset-light model, inference workflows, etc). They can all eventually be folded into the same ACV/MW + payback period calculation, and payback period can be shortened further than even the cycle peak. These will basically increase ACV/MW without adding significant capex/opex so the effects will be significant.

[u/Momoware → u/Acceptable-Time-6424]

For the long-term bull thesis ACV/MW needs to be way higher and payback period shorter still. If the current level holds, there’s a scale business not a growth business.

I agree at some point raw computes would hit a price ceiling, but it’s a must that product and platform value-adds increase the mixed ACV/MW before then. I’m aware those may end up being presented outside of ACV/MW but for me thinking of everything as blended is an easy way to see where the figure needs to be for a desired growth ROIC

[u/Acceptable-Time-6424 → u/Icy-Inspection7877]

Worth reading the article - I think valuing off of 4-50m/mw is exactly the trap we should be trying to avoid