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Yandex: The Undervalued Monopoly

Yandex is continuing its path of solid execution.

The Russian internet space is very promising.

Yandex dominates Russian internet and is exposed to several secular growth verticals.

Yandex’ valuation is very attractive.

We are rated strong buy on Yandex.

Investment Thesis

Yandex (YNDX) is a very unique company which we strongly encourage investors to buy. We are very bullish on the future of Russian internet and see Yandex as the key winner of the industry given its monopolistic operations. We are particularly attracted by the valuation.

Solid Quarter was Met By a Confused Investor Reaction

On 7/26, Yandex announced another stellar quarter beating Interfax consensus revenue and EBITDA and raised guidance.

Revenue grew 41% YoY (excluding Yandex.Market which was deconsolidated) beating consensus by 2%. The quarter also included a revenue growth guidance range increase to 32%-36% from the earlier 30%-34%. Yandex blew through the EBITDA consensus estimate by 8% with 50% YoY growth, reporting a RUB 13.1 bn EBITDA pushing the EBITDA margin to 31.6%. Even as the dominant player, Yandex managed to grow its online advertising revenue 21% and number of taxi rides 49% YoY.

The quarter was marked by impressive performance in the taxi vertical. After posting large losses in previous years, the vertical turned positive for the first time in almost 4 years. This is particularly impressive given that this segment includes large investments in core taxi operations as well as in food delivery and autonomous driving.

The market had, what appeared to be, a confused reaction the news. The stock initially traded up ~5% before ending the day down 3.6%.

Source: Finviz

Yandex is a Play on Russian Internet and is a Key Winner of Several Secular Growth Trends

Russian economy, like in the rest of the world, is moving online. More and more companies are utilizing e-commerce, and online service offerings are increasing by the day. The recent history of the shift in developed markets are good proxies for what is to come in emerging ones like Russia. E-commerce, despite its size, is at the beginning of its growth phase and is showing accelerating adoption. This is creating both a larger audience for retailers and new gigantic industries like online ad sales. Internet of transportation is creating the nascent industry of ride hailing. With these trends young even in developed markets, there are massive opportunities in emerging ones.

Source: US Census Bureau

While these industries are divided up among many players in the west, in Russia the same name comes up as the leader in each. Yandex has 55% market share in Russia’s online search market, and is the leader in ride hailing with Yandex.Taxi (operations merged with Uber (UBER) last year), is the leader in e-commerce with Yandex.Market, and is the leader in Moscow autos classifieds with Auto.ru. Yandex is everywhere in Russian internet, and is continuously adding verticals where they see growth.

Yandex’ monopolistic exposure to Russian internet, particularly given how Russia has high penetration rates of internet (80%) and smartphones (66%) and low penetration of e-commerce (3%), is very interesting and should be highly value generative going forward.

Yandex’ Operations are Characterized by Profitability

Not many companies manage to balance high growth rates (+30% 3 year revenue CAGR) with attractive financials nowadays. Yandex has excellent margins of 70% gross, 26% EBITDA, and 13% net for the TTM. Yandex’ operations are robust cash generators, yielding positive free cash flow since 2011. The cash generation protects investors from dilution and is the backbone of the solid balance sheet with more than $1.1 bn net cash sitting on it. The financials are a dream for any company.

The Company has a Very Undemanding Valuation Given Excellent Growth Prospects

The valuation is very modest given the growth prospects. Yandex is trading at 28x forward non-GAAP P/E, 18x forward EBITDA, and 17x forward cash flow. This is for an operation that is expected to keep up its proven track record of growth and turn exponentially more profitable.

We strongly recommend investors buy the monopoly with the attractive business model dominating a growth industry at today’s valuation. We expect price appreciation both due to organic growth and to multiple expansion.

Source: Seeking Alpha

Risks

In our view, main risk facing Yandex is regulatory. Operating in Russia isn’t easy and tides could change quickly. Currently, we like Yandex’ apolitical standing and see no immediate risk. But the company does operate in sensitive sectors and could come under scrutiny.

Greater competition could hurt the growth profile. Google or any other major competitor prioritizing the Russian market and investing aggressively might take Yandex market share.

Disclosure: I am/we are long YNDX. 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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