Yandex Earnings Q2 2014 - Big Upside Potential!

  • Yandex delievered another quarter of strong revenue growth.
  • Yandex valuations are much cheaper than those of its peers.
  • Yandex is an attractive option for long term investors.

Yandex Earnings Q2 2014 & The Big Upside Potential

Russia’s search giant Yandex (NASDAQ:YNDX) reported its earnings for Q2 2014 on 29 July. The company beat analyst estimates of revenue, to deliver a strong Q2. However, Yandex stock price is still down by over 27% since the beginning of 2014 (Year To Date or YTD). Yandex valuations have been disconnected from its fundamentals since geo political tensions surrounding Russia escalated in the early part of the year. The listing of Yandex’s stock on the Moscow Exchange (stock exchange) should support valuations, as the company’s shares now also trade in its home market.

Yandex Q2 2014 Actuals vs Estimates

Yandex beat revenue estimates only marginally in Q2. The takeaway though, was that Yandex had emerged strongly from what was billed as a testing phase for the company. After sanctions from the US and European Union (EU) and tensions that have followed, investors feared that near term spends on advertising would nosedive in the region, putting pressure Yandex’s biggest source of revenue. Given that background, Yandex’s Q2 numbers were a reassurance of its financial health.

Estimates

Actuals

Beat %

Revenue (RUR billions)

12.12

12.2

0.3%

Revenue (USD millions)

360.4

361.5

0.3%

Note: The currency conversion rate of 33.63 RUR = 1 USD has been taken from the company’s earnings report and used throughout.

Yandex Revenue Growth

Yandex revenue grew by 32% on a YoY (over Q2 2013) basis. After adjusting previous quarters for revenue contributions from Yandex.Money (majority stake sold by Yandex), revenue growth stood at 35%.

Yandex Revenue - USD and RUR revenue

Yandex continued to earn bulk of its revenue from text-based advertising (93%). Revenue from its ad-network continued to grow at a faster pace, driven by Yandex powered paid search on Mail.ru (domestic search competitor). Revenue from display advertising declined YoY and accounted for 6% of total revenue in Q2.

Yandex showed improvements in all metrics that impact its revenue growth. In Q2, the search major accounted for 61.6% of search market share in Russia, marking a marginal decline from 61.9% in Q1 2014. Q2 marked the first uptick in Cost Per Click (CPC) in 4 quarters.

Yandex Q2 2014 Metrics Inforgraphic

Yandex Profitability & Cash Flows

Yandex registered operating and net profits of $108 million and $71.2 million respectively, translating to margins of 29.9% and 19.7%. The company’s net profit margins declined in Q2 largely due to foreign exchange losses. The company’s net interest income also reduced due to the convertible debt it raised in the early part of the year.

Traffic Acquisitions Costs (TAC) declined to 22% of revenue from 24% in Q1.

Yandex’s adjusted net income margin (without forex losses) stood at 27.3%, translating to decent profit margins in spite of the decline. Yandex generated an operating cash flow of RUR 4 billion ($119.6 million) to end the quarter with cash and equivalents of RUR 47.3 billion ($1.4 billion).

Yandex Revenue Guidance & Q3 2014 Analyst Estimates

Analysts estimate Yandex to deliver a revenue of RUR 12.73 billion ($378 million).

Yandex reiterated its full year revenue growth guidance of 25-30% growth over FY 2013 (adjusted to exclude Yandex.Money), implying a revenue guidance of RUR 48.8 - 50.8 billion (USD 1.45 - 1.5 billion).

In Q2, Yandex acquired Auto.ru, a popular online automobile classified listing business in Russia, for $175 million. Yandex already has a portal which aggregates car classified listings across several sites. The acquisition is a step further in the segment and will allow Yandex to earn listing revenue in addition to revenue from ads served.

After its acquisition of location based services business KitLocate earlier this year, Yandex extended its push in the segment, as it launched its local business listings app Yandex.City.

Yandex Valuation

Yandex currently trades at a stock price of $30.5 a share. Yandex’s PE ratio of 24 and Price to Sales ratio of 7.25 represent valuations that are much cheaper than those of its peers.

Yandex

Baidu

Google

PE Ratio

24.3

39.8

30

PS Ratio

7.2

11.8

6.2

Baidu (NASDAQ:BIDU) is the fastest growing and most profitable of the three companies, and Yandex grows faster and has higher profit margins than Google (NASDAQ:GOOG). So, one could value Yandex using the average valuations of its two peers.

Based on the average PE ratio of Google and Baidu, Yandex’s valuation reflects a steep upside with a target price of $43 a share, close to its trading price prior to the Ukraine crisis.

Based on the average PS ratio of Google and Baidu, Yandex’s valuations still reflect a huge (though smaller) upside of 25% with a target price of $38 a share.

With Yandex’s listing in Moscow, the company’s stock price and thereby its valuations should find greater support. U.S investors who invest in Yandex (based in Russia, though listed in Netherlands) and domestic investors in Russia who invest in Yandex are both exposed to different risks. For instance, a Russian investor might not be as perturbed about asset revaluation losses arising out of USD depreciation vs the Ruble. Further, a more diversified shareholder base, is definitely a positive.

In the near term, the stock might continue to be vulnerable to Russia linked political and macro-economic risks. However, at its current valuations, Yandex is an attractive investment option for long term investors. Our Yandex stock analysis assigns it with a buy rating at its current stock price of $30.5 a share.

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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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