A Search Engine Gem

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Russian search engine, Yandex (NASDAQ: YNDX) is of a rare breed, and it is one of the very few companies that has managed to stave off competition from technology behemoth, Google (NASDAQ: GOOG). Google has been operating in Russia for a while now, but its not even close to overcoming Yandex's industry leading position. In my previous post on Yandex, I highlighted how Yandex has managed to defend its position by virtue of a better understanding of the Russian market and earned outsized returns. A SWOT Analysis is needed to check if it can maintain its market-leading position going forward. 

Strengths 

Category Leader: It is the dominating force in the Russian Internet and search engine space. It holds a market share of more than 60.2% market share in Russia. Yandex launched its own browser called Yandex.Browser and this should further reinforce its market leadership position by receiving more search queries. 

Advertising Platform and Relationships: Yandex built a very strong network of advertising relationships that involves 292000+ advertisers using its services in the first 9 months of 2012. And that includes more than 55% of online ad market. 

Text based Ads: A very large proportion of Yandex's revenues come from text based ads for search. Text based ads are highly favored amongst advertisers, as their accuracy and reach towards the target consumers are very high. 

Mobile Front: It is very well positioned to capitalize in a world, where people are more and more inclined to use their mobile devices to browse and navigate relative to desktop. In November 2012,  the company released Apps for a number of Apple products.The company is constantly innovating on mobile, and this will drive more user engagement in the future. 

Local Knowledge and Expertise: Yandex is making inroads to personalize search for users. Ranking search according to a user's online preference and behavior will lead to a better quality experience for the consumer, and which in turn will generate more ad revenue for Yandex. A better understanding of the local market, superior local content has done wonders for companies such as Baidu (NASDAQ: BIDU), Qihoo 360 (NYSE: QIHU) and NHN Corp. in Asian markets to overcome the bigger rivals in the search engine space. The proven business model of paid search, and mastering the quirks of the Chinese language, along with strong local advertising relationships has worked wonders for both Baidu and rising star, Qihoo 360.

Weaknesses

Revenue Composition: Just like any other search engine company, Yandex's revenues are heavily reliant upon advertising revenues, in particular, text based ads. Text based ads from Yandex and partner sites make up ~90% of total revenues.

Geographical Dependence: A large portion of Yandex's total revenues come in from a single country, i.e. Russia. However, a number of companies such as Chinese search giant Baidu (NASDAQ: BIDU) have been immensely successful in a single country market, inspite of facing heavy competition from the likes of Google and increasing competition from new comers in the Internet search party like, Qihoo 360 (NYSE: QIHU). Qihoo 360 has successfully leveraged its platform as an Internet portal and antivirus company, and made its way into the search engine business heavily dominated by Baidu. The same thing can happen at Yandex, if Mail.ru or other Internet based company gains more traction in Russia.

Opportunities

Expand Footprint substantially across a number of countries especially in Europe for search engines and even eCommerce. It is currently present in a few CIS countries and Turkey. Revenues can gain a lot of momentum, if its search engine can be more prominent overseas. 

Online Ad market: The global online ad market is already growing much faster than the offline ad market. And Russia is no different, and this represents a great opportunity for Yandex as it is a leader in search and eCommerce. 

Penetration Rates: A strong thumbs up for Yandex going forward is Russia's high and rapidly growing Internet user penetration rates. As a market leader, Yandex will be able to monetize increased number of queries in the future.

Online Payments: Yandex can expand its e-money and online payments platform substantially, and recently, it announced a Joint Venture with Russia's biggest State-owned Bank, Sberbank to sell 75% of its Yandex.Money platform for $60M. This partnership will help in building up a strong payments platform for retail customers, using the technological know-how of Yandex and the financial acumen of Sberbank.

Ecommerce/Shopping: Yandex built out an online shopping platform called Yandex.Market and it got very strong momentum racking up more than 13M monthly users, according to comScore. The strategic JV partnership of Yandex.Money with Sberbank will provide additional tailwind for the eCommerce platform of Yandex.

Threats

Competition in Search: Operates in a pretty competitive space with Google and Mail.ru Group actively trying to gain market share from Yandex. In particular, Google has upped its position in the Russian search market to 26.5% from 8% in 2006.

Political Risk: Excessive exposure to one country, often carries too much political risk from the standpoint of many investors. However, Yandex is making substantial inroads to change that around by making inroads into other European Economies.

Economic Slowdown in broader Europe can hurt total advertising budgets, even though Russia hasn't been as deeply affected relative to other European countries. Advertising budgets by businesses are slashed during economic downturns, and can hurt Yandex in future economic downturns. 

The Verdict

Yandex is very well positioned to capitalize on future market growth in Russia and other European Countries. Revenues are growing in the ~40-45% range Y/Y, the number of Paid clicks are up 35% Y/Y. In addition, it has attractive profit margins, a clean balance sheet and a strong competitive advantage in its home market, in my view, Yandex has bagger potential. 


 


ishfaque has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu and Google. Motley Fool newsletter services recommend Baidu, Google, and Yandex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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