April 28, 2014 - 8:00pm EST by
2014 2015
Price: 24.00 EPS $0.00 $0.00
Shares Out. (in M): 340 P/E 0.0x 0.0x
Market Cap (in $M): 8,100 P/FCF 0.0x 0.0x
Net Debt (in $M): -1,000 EBIT 0 0
TEV ($): 7,100 TEV/EBIT 0.0x 0.0x

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  • Russia
  • Internet
  • Online Advertising
  • Emerging Markets


To borrow the opening line from olivia08's well-timed GOOG write-up three years ago:

YNDX is value hiding in plain sight, but with no immediate catalyst.

Yandex is the leading internet search engine in Russia with 62% share. We all know search engine is a great winner-takes-all(most) business model with local monopolies, such as Google, Baidu, Yahoo Japan. Yet periodically Mr. Market offers good entry points to buy these great businesses at/below market multiples (GOOG in ’11, YJ in ’12, and BIDU in ’13), and I believe YNDX sub 20x trailing EPS and 15x ’15 EPS (lower ex cash) represents such an opportunity. B/S is pristine with $1B+ net cash vs. just under $8B in market cap. The stock has been hit by Russia/Ukraine tension and some negative comments by Putin on the company/industry. It is off 50% from the recent high at the beginning of the year, and back to the same level three years ago even though revenue/EBIT have more than doubled since. While headlines will likely remain overhangs on the stock in the short term, I am quite comfortable owning a business that should be growing 25-30% for years to come.

Yandex is the dominant search engine in Russia. Market share has been steady at 60%+, including 50%+ on Android/Chrome which use Google search by default. Google is the #2 player with 25% M/S -- Google had gained share since they entered Russia 10 years ago but had remained stagnant recently. Some of the reasons for Yandex's leading position include 1) Yandex is built around Cyrillic characters while Google is built around Roman characters (we have also seen similar dynamic in some Asian countries), 2) Yandex had first-mover advantage and is singularly focused on the Russian market, 3) local relationship/political ties (national champion).

As in other countries, the leading market share of Yandex offers a virtuous circle that will prove tough to crack. 95%+ of revenue comes from advertising, and the majority comes from text based searches, while 7-8% are derived from display ads. The company is fairly diversified across industries/customers. Since ecommerce/mobile/broadband penetration all remain far behind US/rest of the world, I think the secular growth story still has years to play out.

I am not going to elaborate on the attractiveness of the business model. As Google is possibly the biggest hedge fund hotel, I think it is safe to assume everyone is familiar with the arguments. Historical financials speak for themselves -- growth rate/margin/ROIC/FCF.  

Recent operating metrics have been fairly strong. 2013 revenue was up 37%. Q1 ’14 revenue was up 39% adjusted, well ahead of guidance/consensus of 25-30%. Paid clicks grew 49% YoY, partially driven by a new deal with, while Cost Per Click (CPC) was down 5% (likely some mix effect from shift to mobile). Advertisers were up 25% YoY and have been moving up in a beautiful straight line. The only blemish is that EBIT margin contracted due to investments and some increase in TAC costs, but remained healthy at over 30%+. Based on history with GOOG and BIDU, I tend to view these as transient issues, which for some reason always get disproportionate amount of attention from sell-side analysts as they mess up near-term estimates. Another issue that is bound to resurface from time to time is the shift towards mobile (currently about 18% of Yandex's searches). Lastly, I think it is worth pointing out that the strong growth is occurring with the backdrop of a Russian macro economy anything but hot at sub 1% GDP growth.

Yandex was started by two co-founders like Google and is still run by one who owns 10% of shares. The other co-founder/CTO unfortunately passed away last year due to cancer. I do not see any obvious red flags with corporate governance, with FCF mostly used on share buybacks and some tuck-in technology acquisitions. (pretty good interview with CEO. ironically i read it with help of Google Translate).

I have no special insights into Russia/Ukraine situation. Putin’s comments regarding more control of YNDX sound scary, but I think those will likely prove hollow threats in the end. I actually think it is more likely that Google could be ousted from Russia like in China, which would be an absolute windfall for Yandex.

In the near term, global/EM PMs will likely continue to “reduce exposure to Russia”, so stock could be stuck for a while or continue to drift lower, but I think it has an excellent shot at doubling in 2-3 years without much multiple expansion based on $2 EPS power. There are other potential upside options in e-commerce.

The biggest risk is currency and country level risk. It is no secret that many Russian stocks have been decimated so far this year and investors have traditionally (rightly) demanded a higher hurdle rate for Russian equity. I see some similarities to the negative sentiment towards Chinese stocks two years ago after the reverse merger debacles. Some of the best companies were thrown out along with the bath water and most have since recovered fully.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


Resolution of Ukraine crisis?
Continued growth.
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