Yandex (NASDAQ:YNDX), often named as the 'Google' of Russia remains an undisputed leader in the Russian search market with 61.7% market share, followed by Google with 26.9% market share. Yandex came out as one of the best performing US listed Russian stock in 2013, with stock price gaining about 89% over the last year. We have been bullish on Yandex stock for some time now with the stock scoring a high rank in our analysis. Today we analyse Yandex’s financial performance and relative valuation in comparison to its search engine competitors.
Yandex: Opportunities Ahead
In news release issued by Yandex, the company entered into a recent partnership with social giant Facebook, where Yandex will index Facebook’s publicly published content on its search results. It will boost the search engine’s access to public information, and improve the quality of the search results, and therefore, may increase its market share. Yandex’s competitive advantage over Google in Russia lies in the majority Russian speaking users who seem to prefer it over the international giant. Yandex is trying to increase its reach geographically to more countries, particularly the non-English speaking ones, to boost higher revenue and earnings potential. The company has begun to implement its mobile strategy by launching web browsers for its iOS and Android users. We feel that these opportunities in the untapped areas for Yandex can significantly change company’s fortunes in the coming years.
Yandex performance so far
In its most recent quarter, the company reported revenue growth of 34% on a Y/Y basis and an operating margin of 31.8%. Yandex has been consistently maintaining an average Y/Y revenue growth of 36% in the last four quarters. Investors seem to acknowledge this high growth of the company resulting in the stock price jump last year. Looking at its operating and net income margins, Yandex does a good job of converting a larger percentage of its revenues into profits than most of its peers do. With its competitive advantage over Google in Russia, Yandex drives a higher cost per click, resulting in higher growth for the company.
|(Avg.last twelve months)||Yandex||Baidu|
|Net Income Margin||33.60%||21.70%||36.90%|
See Also: Yandex Income Statement
(Baidu also does a great job when it comes to Growth & Margins, however unlike Google it is not a Yandex competitor. We have been bullish on Baidu for some time now. Read our our analysis to see why!)
In the Q4 guidance given by Yandex, it expects to achieve higher end of revenue growth guidance of 34%-38% provided in the earlier quarters. The company has consistently beaten analyst estimates of Zacks for the last 4 quarters, and we expect the same for the upcoming results as well. Yandex will report its Q4 2013 earnings on Feb 13, 2014 (estimated).
Yandex Relative Valuation in comparison to peers
|Trailing LTM P/E ratio||34.97||35.08||31.38|
|Forward P/E ratio||31.16||26.73||32.35|
According to Zacks analysts estimates summary, Yandex's forward P/E is 31 and its PEG ratio is 1.03. We believe that the forward PE of 31 times factors in the high growth expectations for the company. Therefore, we compare the companies on the basis of the PEG ratio which is price to earnings ratio adjusted for different growth expectations. Yandex’s PEG ratio stands at 1.03, below both Baidu and Google, which currently have a PEG ratio of 1.11 and 1.57 respectively. This lower PEG indicates that the company is undervalued in comparison to its peers considering the higher growth potential.
Assuming 40% growth in earnings, Yandex is valued at a target price of $51.91, as can be seen in the table below. We have assumed an implied price to earnings ratio of 32 for valuation purposes, which is average for the industry. From its current price of $43.76, Yandex has an upside potential of 19% over the next year.
|Expected growth in earnings||40%|
|Current LTM earnings||$403.50|
|Expected earnings next year||$564.90|
|Current price of YNDX stock (as of Jan 16, 2014)||$43.76|
|Outstanding YNDX shares||348.25|
|Implied P/E ratio||32|
Our only concern is around Yandex’s exposure to the macro risk of the Russian economy. Yandex is a well-positioned company in a growing market and we continue to be bullish on Yandex ability to outperform.
To see Yandex’s latest stock price movement, click here (NASDAQ:YNDX)