What started in 1989 - 90 as a search system for the government of the Soviet Union, is today, one of the world’s most popular search engines. Yandex (NASDAQ:YNDX), Russia’s internet search giant currently runs the risk of getting entangled in Russia’s political aspirations.
Yandex stock price at $31.42 a share, has fallen by over 26% since the 19th of Feb 2014 and nearly 31% from its 52 week high on the 9th of Jan, prior to Russia’s move to annex Crimea. While there may be risks in the near term, we think the huge dip arising from panic selling is a great opportunity for the long term investor.
Crimean Crisis: Impact on Yandex and Russia
Investors were concerned about the fact that economic sanctions imposed by the EU (European Union) and the US could dent an already weakened Russian economy. In times of such economic downturns, it is expected that discretionary spends like advertising, the largest source of revenue for Yandex, will be affected the most.
The EU (European Union) countries have jointly imposed some sanctions on Russia with more scheduled to come soon. However, so far, it has restricted itself to travel bans and asset freezes directed at 21 Russian and Ukrainian officials, while the US has released a similar list of 11 individuals with 3 common names between the two lists.
Given that any sanctions pertaining to oil and gas trade would have a huge economic impact on all the entities involved, experts believe that the real impact from impending punitive measures on the Russian economy may be limited.
Yandex Revenue and Profitability
Though revenue in FY 2013 fell short of the company’s guidance, one can’t ignore the fact that Yandex’s performance remained excellent. Revenue grew to $1.2 Billion and profit margins were in line with its 3 year averages even after adjusting net profits for one time income from the sale of majority stake in Yandex.Money.
As far as financial track record is concerned, Yandex has not only displayed robust revenue growth but also unwavering profitability at both operating and net levels, on a consistent basis.
In FY 2013, more than 98% of the company’s revenue came from advertising with 1% coming from Yandex.Money. Going forward any revenue from Yandex.Money will form a part of other income.
Q4, 2013 saw paid clicks grow at 52% vs 50% in Q3 2013. Revenue from advertising on partner sites (or ad-network) nearly doubled sequentially, as the segment grew nearly twice as fast as ad-revenue on Yandex sites in FY 2013. The same is a result of the company’s partnership with its domestic competitor Mail.ru which holds 8.2% market share of the Russian online search market. Though advertising on Yandex owned sites is more profitable, the development is a result of choice rather than chance and is likely to continue.
Yandex Internet Search Market Share
Though Google is still the favourite search engine in most parts of the world, Yandex controls 62% market share in Russia and has edged past Google in Belarus. It accounts for over 30% of the search market in Ukraine and also operates in Turkey and Kazakhstan. Thriving on its adaptability to local language search requirements in these regions, Yandex is on a roll.
Yandex is planning a foray into the Middle East, a move that would diversify its geographical risk.
Key Drivers of Future Growth
Yandex – Google RTB Deal
Yandex has recently entered into a tie-up with Google which could give a big boost to the former’s display-ads revenue. The deal will allow Google’s advertising clients to bid for ad-spaces on sites in Yandex’s ad-network while advertising clients of Yandex will be able to access global ad-displays via Google’s DoubleClick Ad-Exchange.
The cross selling of ad inventory is carried out via an RTB or real time bidding system where buyers bid to acquire ad-space. Estimates are that by 2017, these RTBs will account for 29% of digital display ad spend in the U.S. Apart from helping Yandex expand its advertiser base, this could partly hedge their risk from economic slowdown in Russia and also help them monetize their market share in regions outside Russia.
Another exciting opportunity for Yandex lies in its transformation of Yandex.Market from a price comparison site into a full-fledged e-commerce portal. An e-commerce portal run by a search engine undoubtedly has huge potential in itself, but the fact that Russia is now home to Europe’s largest internet audience will definitely help its cause.
Yandex recently acquired Kinopoisk, Russian equivalent of IMDB, to bolster its online video advertising revenue.
Yandex has seen an increase in search shares across mobile platforms and its mobile maps based ‘TAXI’ application has been hugely popular in Russia. Yandex’s recent acquisition of KitLocate, the developer of an energy efficient geo-location technology for mobile devices re-iterates the company’s increasing focus of mobile platforms.
When compared with its peers on the basis of revenue growth and profitability, Yandex does consistently better than google though Baidu remains the best of the lot.
|Return on Equity (ROE)||16%||32%||31%|
|Return on Invested Capital (ROIC)||41%||44%||115%|
If one were to value Yandex based on the average P/E enjoyed by its peers (P/E of 31.74), it would be priced at $37.5 a share, representing a 19% upside from its current price of $31.42.
Yandex has the all the key elements of a financially robust company, healthy ROE, ROIC, a great track record and a gamut of exciting opportunities to work with in the coming quarters. In our view, Yandex is a company with great fundsmentals, but is currently bearing the burden of geo-political risks. In the long run however, once these risks have subsided, Yandex would be a great investment.
To see Yandex Inc.'s latest stock price movement, click here (NASDAQ:YNDX)