Are Yandex Valuations Compelling Yet?

  • Yandex is down by close to 38% in 2014 so far.
  • Yandex is fundamentally strong and looks poised to grow.
  • Yandex valuations make it attractive for long term investors.

Are Yandex Valuations Compelling Yet

On Tuesday, 7 Oct 2014, major US indices like the S&P 500 and the NASDAQ Composite ended lower by about 1.5% as global growth concerns gripped financial markets. One of the casualties of this broad based correction was Russia’s internet search giant, Yandex (NASDAQ:YNDX). While the company’s global counterpart Google (NASDAQ:GOOG) fell by 2.3%, Yandex ended the day down by about 3.1%.

Being a Russian company, Yandex is one of those internet stocks that has not really recovered from the corrections following the Russia-Ukraine crisis that erupted in March this year. While the geo-political risks around Yandex haven’t faded away completely, the company’s financials for the first half of FY 2014 remained largely unaffected by the crisis. Considering the company’s strong fundamentals and attractive valuations, any corrections could serve as opportunities for long term investors.

Yandex Revenue Growth

Yandex operates largely in Russia, and reports its financials in Russian Rubles (RUR). To focus on its operating performance and eliminate the impact of forex fluctuations, we’ve based our computations on Rubles.

In Q2 2014, Yandex registered a solid revenue growth of 35% YoY (over Q2 2013) to ward off fears about the impact of the crisis. Since the company sold majority stake in its payments business Yandex.Money, revenue from the segment has been eliminated form previous quarters to arrive at comparable numbers. The company’s revenue for the quarter was RUR 12.16 billion ($361 million).

The company showed improvements across all business metrics. Surprisingly, in spite of the ongoing crisis in Q2, Yandex saw a 1% improvement in CPC (Cost-Per-Click), the first uptick in 4 quarters. Search queries grew by 21% YoY while Paid Clicks grew by 36% YoY.

Yandex Revenue Growth

A recent article on Reuters shows how Yandex is reducing its dependence on Russian advertisers by leveraging its dominant position in Russia’s internet search market. Yandex has increased its revenue from foreign advertisers tenfold over a period of two years. The fact that Russia is home to Europe’s largest internet audience is an inherent advantage to Yandex, which controls a little over 60% of the Russian search market. In addition, Yandex also powers paid search listings on one of its local competitors.

The company’s latest acquisition of ADFOX Advertising Technology Platform is another positive. ADFOX which provides services to plan, manage and analyze online ad campaigns, also allows its clients to place ads in various formats including banners, mobile ads and videos. ADFOX reportedly serves more than a billion ads every day and could reinforce the ad-revenue growth for Yandex, which earns more than 99% of its revenue from advertising. As expected, Yandex also plans to extend some of its capabilities like its ad-targeting technology to ADFOX’s products, a move that will create value for both entities.

Yandex has also been expanding into services like local business listings (like Yelp), classifieds and e-commerce. Being run by a search engine, these businesses could hold significant potential. To sum up, there are reasons to be optimistic about Yandex’s revenue growth.

Yandex Profitability

Yandex’s profit margins have declined over their three year averages. However, profitability is still decent at Yandex. In Q2 2014, Yandex registered operating and net profit margins of 30% and 20% respectively. However, one of the biggest drags on net margins were forex losses arising out of revaluation of USD denominated assets.

Excluding forex losses, Yandex’s net margin would have been just under 25%, almost identical to its performance in Q1 2014. Why is this important?

During Q2 2014, the USD had depreciated vs the Ruble by just under 6%, leading to revaluation losses for Yandex. However, during Q3 2014 (ended Sep 2014) the USD has appreciated by close to 18%. So, Yandex could come out reporting solid numbers due to revaluation gains.

To sum up, the company’s profitability is better than it appears to be and is healthy at its current levels.

Yandex Valuations

Yandex now trades at $26.17 a share, much lower than it did during our Q2 2014 earnings review. Yandex now trades at a PE ratio of 21.4 and a Price to Sales ratio of 6.4. Yandex is currently trading at significantly lower valuations when compared to its peers, Google and Baidu (NASDAQ:BIDU). Baidu being the one with the highest growth rates and profitability, enjoys much higher valuations. Yandex is still growing at a faster clip compared to Google, and also has higher profit margins.

Based on the average PE and PS multiples of its peers, Yandex should trade between $37-$42 a share indicating a potential upside that ranges between 42% and 62% respectively. Though Yandex might still be prone to volatility in the short term stemming from its higher exposure to tensions in Russia, its valuations make it an attractive long term investment option. Our Yandex stock analysis assigns the stock with a buy rating at its current valuations. You can also see which other stocks which make it to out list of stocks to buy.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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