This is why I’m 5.7m short NBIS

Let’s look at the math why I am short $NBIS since many of you asked.

The biggest tell that $NBIS valuation is out of control is that Nebius indicates it is not sustainable.

During the last earnings call, Nebius has shown it is now encouraging other data center developers to take on capex and own the facilities whereas it would just provide the software stack and management expertise.

As @RealJimChanos pointed out, they then proceeded to refuse to breakdown economics on their software stack, putting it in overall ARR.

If Nebius had such a great business model, they wouldn’t be pitching a push down to third party balance sheets of these assets.

It shows management is smart and sees this is not sustainable. Why?

The basic math on a data center development is it takes about $4 in capex to generate $1 in revenue.

Once you count in OPEX, you’re looking at about $5 to generate $1 in revenue, which on the surface is 20%, however it actually isn’t.

At least half of the cost of a data center is GPUs, which become obsolete after 4 years, but let’s assume it’s 5 years.

This implies, if Nebius invests $25 billion in capex as it currently says, it will generate about $5 billion in ARR, which is consistent with their ~$8b ARR guidance given current status and already committed CAPEX previously.

In 5 years time, it will recoup the $25 billion in this timeframe. At which point it will have written off its GPUs meaning it would have gained data center assets worth about $12 billion after 5 years.

That would be a rate of return under 10% IRR already and average for commercial real estate.

If you add in the fact data centers also have a lifecycle before their equipment needs to be updated even in 15 years and SGA, you come up with about 7-8% cap rate in the best case.

However, then comes cost of capital, as the 25 billion has not been raised yet. Even if you assume 1/3 will be funded by pre-payments and use the Fed Rate without any premium for financing, you’d still lower 2%-2.5% the return and it’s likely more.

This leaves a 5-6% return on an investment with pricing and execution risk.

Now assume conservatively that it costs $30 million to build 1MW fully operational to sell compute, you’d need $30 billion to build out 1 GW of power, which is not far from NBIS guides despite them being on lower GPUs for now that cost less.

This would imply the CAPEX cost to build out all 4 GW Nebius has contracted would be $100-120 billion on the low end, if they could ever raise this much capital, even if you think there is enough demand for it.

In that best case scenario, and even if you assume all data center projects start immediately, which they won’t, you’re looking at best case:

2026-2031: CAPEX paid off
2032-2037: $10 billion per year net cash flow
2037-2042: $8 billion per year net cash flow (as DC equipment needs rebuild)

Running a DCF analysis with just a 4% premium to the current fed rate gets you a Net Present Value of $37.8 billion.

This works out to $148 per share in a best case scenario and:
1/ All DC won’t start building at the same time.
2/ NBIS won’t get enough capital to build all the 4GW this quick
3/ This assumes perfect execution

To the bulls saying we could see AI rocket to the moon, sure, we could, but the upside will be captured by chip makers and those that own the AIs on the other end.

My prediction is that, knowing this, Nebius will likely eventually sell off the data centers into a REIT and position itself as an asset light operator that will trade at a multiple of earnings.

But even if in that distant $24b ARR future is able to command 10% operating fees and trade at 20-25 earnings, it would still be a 50 billion valuation but 10-15 years from now - which would be a fantastic achievement for sure, just not for current investors.

Didn’t even touch on their necessity to raise equity for buildouts after Meta/MSFT projects which are already built into the forecasts.