Thursday, 12 January 2017 06:41

Yandex: Potential Growth Drivers



  • The share of Yandex in the Russian search market has stabilized at the level of 48%.
  • maybe this is only a short-term success of Yandex.
  • The forecasted growth of Yandex’s share prices is rather based on external than internal factors.

In my article dated December 30, I gave a positive forecast for Yandex (NASDAQ:YNDX), describing the external factors that were beneficial for the company: strengthening of the ruble, increased business activity and growth of the Internet advertising market in Russia. This time I would like to provide more detailed description of the company's internal trends, in order to better understand the real factors that influence the growth of the share prices.

Despite the multifaceted company's activity, the key source of Yandex's revenue is the search engine business.

It must be recognized that, although "E-commerce" and "Yandex. Taxi" segments are gradually increasing their shares in the structure of the company's gross income, their joint share in the company's revenue, according to Q3 results, was only 9%, while "Search and Portal" segment secured 88% of sales:

36835796-14838782987578635 Yandex: Potential Growth Drivers

Analyzing the sources of the company's profit using EBITDA, we get even more contrasting results: in Q3, the positive EBITDA was only generated by "Search and Portal" and "E-commerce" segments. The remaining segments gave zero or negative results.

In other words, "Search and Portal" segment is not only accountable for the profit of the company, it also sponsors its unprofitable activities. It is also important to note that over the past year, the EBITDA of "Yandex. Taxi" fell from the profit of 44 million rubles to the loss of 633 million rubles, reflecting tough competition with UBER on the territory of Russia. As for the "E-commerce" segment, although EBITDA is positive, there are no growth trends - the profit remains at the level of 400 million rubles for already two years:

36835796-14838783422380521 Yandex: Potential Growth Drivers

So, it should be clearly understood that Yandex is first and foremost a search portal that makes profit on the Internet advertising. And, judging by the current trends, this situation is unlikely to change within the next year. This means that it is the popularity of Yandex as a search engine that will determine its financial results in the near future. It is both good and bad news for a potential investor.

Over the past two years, the share of Yandex in the Russian search market decreased by 3.3%, while Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) share increased by 5.7% over the same period. The long-term trends suggest that the shares of Yandex and Google will become equal by June this year:

36835796-14838814631171746 Yandex: Potential Growth Drivers

However, over the past three months, the market shares of both Yandex and Google remained practically unchanged. This may be a short-term Yandex success in its fight against Google for the Russian search market, however, it is still very premature to talk about a longer-term change.

36835796-14839752369982028 Yandex: Potential Growth Drivers

There is another problem. Internet users gradually give preference to mobile gadgets, and this tendency is reflected in Russia as well as in the rest of the world. Unfortunately, Yandex lost the mobile search market to Google long ago. Moreover, the long-term trends still suggest that the gap continues to widen: 

36835796-1483881552187955 Yandex: Potential Growth Drivers

Putting it all together

So, after all the above, again, as on December 30, I would like to make a positive forecast for Yandex's shares. Please note, however, that the expected increase in the Yandex's share price is only based on the improved external environment, as well as the local stabilization of Yandex on the Russian search market, which will probably allow Q4 results to surpass the analysts' expectations. Once these factors are reflected in the price, Yandex's quotes will return to the lateral trend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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