Yandex: Russian Google in the Making
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With its stock price falling ~45% since its IPO, Yandex (NASDAQ: YNDX) has underperformed its global peers Baidu (NASDAQ: BIDU) and Google (NASDAQ: GOOG) despite a solid operational performance. We believe that the stock is greatly undervalued and investors are ignoring the strong fundamentals given the consensus revenue growth estimates of 45.50% YoY in 2012.
Source: Google Finance
Distribution concerns overblown:
Investors are concerned about the distribution of the Yandex Search engine with the rise to dominance of the Google Chrome browser and the Android mobile OS. Here is why we think the distribution concerns are overdone:
1) Yandex occupies higher search share in Chrome than Google:
Yandex occupies a larger share of searches among Russia Chrome users than Google. We believe that Yandex's product quality and better functionality is driving users to change the default search settings in Chrome from Google to Yandex.
2) Yandex continues to offer customized Firefox:
Although Firefox has changed the default search option from Yandex to Google (See: Google: Solid Q2 Earnings – Keeping a Bullish View), we believe that it will not have a material effect on the share of searches coming to Yandex through Firefox. This is due to the fact that the majority of Russian users install Firefox either from Yandex directly or from its partner sites where Yandex is the default search engine.
3) Development of own web browser:
Yandex has developed its own browser and plans to develop three mobile platforms, according to company CEO Arkady Volozh. In addition to Yandex Shell (Mobile platform for Android), Yandex plans to develop its own mobile platforms for Apple’s (NASDAQ: AAPL) iPhone, Microsoft’s OS (See: Microsoft: Better than Expected Q4 Earnings- Buy) and Samsung's Bada OS.
Contextual ad revenues to grow:
Russian contextual ad spending per capita is still very low at around $6, compared to $27 in Europe and $45 in United States. We expect Russia’s spending to increase as companies start allocating more funds to online marketing. Yandex is continuing its work in the contextual ad business as it introduced a new algorithm, ‘MatrixNet,’ for partner site monetization back in 3Q11. In 1Q12, Yandex implemented ‘Real-Time Bidding’ technology, a bid-based model for display advertising. The technology enables advertisers to choose a specific target audience for the ad and pay according to their bids. We believe that the continued developments in the advertising area will boost ROI for advertisers and revenues for Yandex as it catches up with contextual ad spending per capita in European and US markets in the long term.
Yandex.Money – Set to be the next PayPal:
Yandex.Money is a virtual payment system that allows users to have virtual wallets and to use them to pay for items purchased online much like eBay’s PayPal. Although the actual revenue contribution from Yandex.Money is relatively small right now, we believe that the importance of having the dominant payment service should not be overlooked. We believe that Yandex.Money has the potential to provide an upside to the revenues in the future as the Russian e-commerce market takes off.
We believe that Yandex is set to continue its leadership position in Russia in the near term with the CEO of Google Russia leaving and no long term campaigns planned by Google in Russia. In terms of near-term catalysts, we expect strong 2Q12 results due around 31 July. We also expect Apple (See: Apple Q2 earnings : An Opportunity to Take a Bite) to strike a distribution deal with Yandex in Russia as it did with Baidu (See: Baidu: A Good Near And Long Term Buy and BAIDU 2Q12 Earnings: Strong Growth despite Macro Headwinds-Buy) in China, considering the market similarities between Baidu and Yandex (both underpenetrated and both use a different language for search). Given the ample short and long term opportunities ahead of Yandex, we rate this stock as a Buy.
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