Yandex (NASDAQ:YNDX) known as the ‘Google’ of Russia is well positioned to capture the growing Russian Internet ecosystem. It ranks first in Russian web search market with 63% market share, followed by a 26% market share of Google and others hanging on the smaller portions of the pie. With Russia’s increasing internet penetration (2012: 53.3%), we believe that the company can provide better monetization of the same traffic through higher volumes and better advertising coverage. Also, Yandex enjoys a premium cost per click (CPC) over Google, which can further drive value creation for the company. Besides Russia, it also operates in Ukraine, Kazakhstan, Belarus, and Turkey.
Russian Web Search Market Share
Yandex Revenue Segments
The company drives more than 70% revenues from text based advertising and 30% from others including Yandex.Market, home page, maps and traffic, weather etc. Let’s take a look at the segmental results of Yandex and its Y/Y growth in the table below.
|In RUR millions||Q3 2012||Q3 2013||Y/Y %|
|Text Based Revenues|
|. Yandex websites||5,255||7,011||33%|
|. Ad network||1,284||2,339||82%|
|. Total text based Ads||6,539||9,350||43%|
|. Display Ads||580||782||35%|
|Total advertising revenues||7,119||10,132||42%|
|Online payment commissions||133||7||-95%|
Source: SEC Filings for YNDX
The majority of the online advertising revenue is from its own websites which gives higher profit margins. Similar tp Google’s Chrome browser, Yandex has also launched two mobile browsers, each for android and iOS. Currently majority of ad revenues are text based, so Display advertising represents a huge growth opportunity for Yandex. For driving display advertisement it needs a social media or a video platform like Google+ or youtube, which will be crucial in targeting display ads to users.
The top line growth for the company has been massive at 200% for the last two years. In the third quarter of 2013, revenue grew by 34% Y/Y, with operating margin and net income margin of 32% and 48% respectively, compared to 23% operating margin and 20% net income margin of Google. It has beaten Zacks.com estimates with an earnings surprise of 84%. It has also consistently beaten the analyst’s earnings estimates for last five quarters. Although the operating margin has declined on a Y/Y basis, a robust net income margin of 48% makes the company’s financials very attractive. The company has an operating cash flow of $306mn with cash reserves of $350mn and is also debt free, which will allow the company to make capital investments in product development.
Comparison of Yandex and Google’s financial performance for Q3 2013
|Performance Statistics||Yandex (YNDX)||Google (GOOG)|
|Revenue growth (%)||34.1||5.6|
|Net Income Margin (%)||48.6||19.9|
Yandex shares are currently trading at an annualized Price to earnings ratio of 20, which we believe is trading at a discount compared to its peers like GOOG (29) & BIDU (27), given the company’s dominant position in the Russian advertising market, its double digit revenue growth numbers and margins. The high margins justify the high price to book and price to sales ratio of 9.8 and 9.1 respectively.
We are bullish on the Russian search giant going forward. We also believe there is sustainable demand for performance based advertising amid concerns over the Russian macro environment. An investment in Yandex would also mean diversification from country specific risk related to US economy. Moreover, the deal with Main.ru and steps to improve its click through rates should further secure Yandex’s leadership in the advertising. We expect the growth opportunities in emerging markets like Turkey with fast growing internet population will boost Company’s revenue and earnings further. It also has recently unseated Bing as the fourth largest search engine in the world and still has big room for expansion. Yandex (NASDAQ:YNDX) share price closed yesterday (Nov 18, 2013) at $38.78.
To see Yandex’s latest stock price movement, click here (NASDAQ:YNDX)