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YNDX - Yandex


jawn619
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  • 8 months later...

I've started looking at Yandex and it's interesting that it owns such a large lead over Google.  Typing Yandex in Quora yields quite a few responses from users on why Yandex beats Google in Russia.  One of the main reasons is that Russia is a very difficult language and there are a lot of cultural nuisances that allows Yandex to beat Google.  Yandex also has a bigger sales presence and infrastructure in place.  The question then becomes can Google throw a ton a capital in Russia and take shares away from Yandex?  There's no need to preach why owning a dominant search engine is a good business, i.e. large market share, fix cost, scale up easily, growth trajectory, operating leverage etc.   

 

The last time I was afforded an opportunity to buy a 70% search engine was March of 2009 when it traded at around 15x p/e.  Yandex is currently trading with a awful backdrop with the Sanction against Russia and oil crisis.  Owning Yandex can be interesting from a buying a 1) Compounder against 2) a currency re-rate at a later date type of play.  Hoping that others who are more versed in search and internet will opine on this. 

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Is there any issue in accessing google in Russia? During my recent trip to China, I could not access google, gmail, so that basically guarantees monopoly of Baidu in China. I wonder if the same could happen to Google in Russia.

 

Google has a 26% market share in Russia. I'm not sure exactly why they are #2, but my guess is some combination of Yandex providing more relevant results, cooperating with government policies, and significantly higher local investment (Google no longer has an engineering team in Russia). The Russian government has gone back-and-forth on whether they want to ban Google completely.

 

http://recode.net/2015/02/18/russias-yandex-seeks-google-probe-as-market-share-falls/

http://connect.icrossing.co.uk/a-closer-look-at-yandexs-market-share-in-russia_12575  (Interesting opinion piece on GOOG being the possible market share leader in Russia)

http://www.cnbc.com/2015/05/22/russia-threatens-block-on-google-twitter-facebook.html

http://www.bloomberg.com/news/2013-04-26/why-google-isn-t-winning-in-russia.html

 

I think Naver Corp is the most interesting of all the global search engines, given the friendly relations between the US and South Korea (which has similar language/culture challenges for Google).

 

http://www.obandigital.com/gb/blog/2015/01/30/why-google-cant-dominate-search-in-south-korea/

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Is there any issue in accessing google in Russia? During my recent trip to China, I could not access google, gmail, so that basically guarantees monopoly of Baidu in China. I wonder if the same could happen to Google in Russia.

 

Government intervention in China certainly helps Baidu.  But Google was suffering for quite some time in China.  I think there were 5-10 factors that helped relegate Google to the #2 position in China prior to the company pulling out.  Something as simple as most Chinese can't spell "google" to access the website is important.  Guge.com would be the phonetically correct way to spell Google per the way Google branded themselves in China as the "songs of the valley". 

 

There is a clear trend that in Asia countries, Google somehow can't dominate search. 

 

http://returnonnow.com/internet-marketing-resources/2013-search-engine-market-share-by-country/

 

http://www.quora.com/Why-is-Yandex-the-most-popular-search-engine-in-Russia-and-not-Google

 

 

 

http://www.businessinsider.com/why-google-wasnt-winning-in-china-anyway-2010-1

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  • 3 weeks later...

So the Russian officials stated that Google abused its power with Android by setting itself as the default option. Yandex has been taking a hit again, moving closer to the 52 week lows of $9.94. As far as I've understood, the results this year will be hit by the currency effects (rents in USD etc) and the Russian economy overall. I haven't dipped my toe into this one yet as I don't feel like I understand why it'll be the winner in the end. Is it enough that Russian language and its peculiarities give Yandex an advantage over Google, and that the Russian government seems to be ruling against Google? It certainly looks cheap if you're willing to hold for years and wait for the company to grow and get over the currency issues etc that shouldn't be a long-term problem.

 

Anyone have any more specific thoughts about YNDX and why it'll be a winner?

 

http://www.bloomberg.com/news/articles/2015-09-14/russia-says-google-broke-antitrust-laws-sending-yandex-soaring

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I don't have a position but everything in the financials screams top tier business. Maybe it's time to look past the surface of "this is a Russian company" and do a little more work.

 

YNDX has an EV of $3.4b and earns an FCFF that has fluctuated between $150m and $250m, using the current FX rate. I am ignoring the last twelve months, where Yandex actually burned cash, with a negative $70m FCFF. I see no margin of safety at current levels. If you take the highest FCFF that Yandex earned in the past few years and apply it to the current EV, that's a 7% yield. 

 

If the share price drops below $7.00/sh, I would potentially get interested. There are things to like here (e.g. buybacks), just not at the current price.

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I don't have a position but everything in the financials screams top tier business. Maybe it's time to look past the surface of "this is a Russian company" and do a little more work.

 

YNDX has an EV of $3.4b and earns an FCFF that has fluctuated between $150m and $250m, using the current FX rate. I am ignoring the last twelve months, where Yandex actually burned cash, with a negative $70m FCFF. I see no margin of safety at current levels. If you take the highest FCFF that Yandex earned in the past few years and apply it to the current EV, that's a 7% yield. 

 

If the share price drops below $7.00/sh, I would potentially get interested. There are things to like here (e.g. buybacks), just not at the current price.

 

Since 2010, Yandex has grown it's revenues from 12.5B RUR to 50.7B RUR. That's over 40% revenue growth compounded. Operating income has grown over 30% compounded in that time. Using your numbers, that's 14.5x TRAILING FCF and closer to a 11x Forward Earnings/FCF. 

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I don't have a position but everything in the financials screams top tier business. Maybe it's time to look past the surface of "this is a Russian company" and do a little more work.

 

YNDX has an EV of $3.4b and earns an FCFF that has fluctuated between $150m and $250m, using the current FX rate. I am ignoring the last twelve months, where Yandex actually burned cash, with a negative $70m FCFF. I see no margin of safety at current levels. If you take the highest FCFF that Yandex earned in the past few years and apply it to the current EV, that's a 7% yield. 

 

If the share price drops below $7.00/sh, I would potentially get interested. There are things to like here (e.g. buybacks), just not at the current price.

 

Since 2010, Yandex has grown it's revenues from 12.5B RUR to 50.7B RUR. That's over 40% revenue growth compounded. Operating income has grown over 30% compounded in that time. Using your numbers, that's 14.5x TRAILING FCF and closer to a 11x Forward Earnings/FCF. 

 

Yes, that historical growth is impressive, but not so much recently, e.g. 2014/2013 operating income growth was 20% (in local currency), and LTM June'15 operating income growth is down on the previous period and is now roughly equal to its 2013 level (in local currency). And then there is the cash burn in recent quarters. Yandex is not immune to the broader economic environment in Russia. The growth that Yandex achieved in the past few years must be put in context with the Russian economic bonanza caused by an oil price north of $80 per barrel. Low oil price, capital flight and economic isolation are taking their toll, and it's anyone's guess how long those 'regime-changing' factors will continue to act. I think that if in 2016-2019 the oil price stays low and Putin continues to keep Russia isolated, the FCF growth that we will see in US$-terms will be a far cry from 20% p.a. Big, exogenous things like macro are tough to handicap. And that's why I prefer to look at the trailing yield, where BTW if I was to pick the FCF from FY14 or the average FY09-14 annual FCF instead of the FCF in its highest year (FY12), then the trailing yield would be much lower than the 6% that I ball-parked in my previous post. What I am saying is, I do not wish to get ahead of myself here. Neither a bull nor a bear on the stock, just trying to stay objective.

 

And then you peel the onion and start looking at the specifics of the local market. For one, I do not completely buy the argument that Yandex 'controls' the Russian market and Google will be kept out, either by Yandex or by the government. First, Google already has a >20% share of the market. Second, the whole 'Russian government will protect Yandex' argument may cut both ways. E.g. through Gazprom, the government indirectly owns the 3rd Russian search engine, Rambler.

 

Those are just some of the things that I would recommend people to keep in mind if you want to build a bull thesis on this stock .

 

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So the Russian officials stated that Google abused its power with Android by setting itself as the default option. Yandex has been taking a hit again, moving closer to the 52 week lows of $9.94. As far as I've understood, the results this year will be hit by the currency effects (rents in USD etc) and the Russian economy overall. I haven't dipped my toe into this one yet as I don't feel like I understand why it'll be the winner in the end. Is it enough that Russian language and its peculiarities give Yandex an advantage over Google, and that the Russian government seems to be ruling against Google? It certainly looks cheap if you're willing to hold for years and wait for the company to grow and get over the currency issues etc that shouldn't be a long-term problem.

 

Anyone have any more specific thoughts about YNDX and why it'll be a winner?

 

http://www.bloomberg.com/news/articles/2015-09-14/russia-says-google-broke-antitrust-laws-sending-yandex-soaring

 

Honestly, Google gaining shares from 34 to 42% is very close to a dagger in the investment thesis for me.  I understand that the Russian government will likely protect Yandex.  But I pay up for great businesses because they exhibit winner take all characteristics and operating leverage as the revenue scales.  The fact that Google can throw some resources at this and gain market share is very alarming to me.  Previously, I had seen figures in the 60s for Yandex and ceding that share to 50% is likely too much for me. 

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So the Russian officials stated that Google abused its power with Android by setting itself as the default option. Yandex has been taking a hit again, moving closer to the 52 week lows of $9.94. As far as I've understood, the results this year will be hit by the currency effects (rents in USD etc) and the Russian economy overall. I haven't dipped my toe into this one yet as I don't feel like I understand why it'll be the winner in the end. Is it enough that Russian language and its peculiarities give Yandex an advantage over Google, and that the Russian government seems to be ruling against Google? It certainly looks cheap if you're willing to hold for years and wait for the company to grow and get over the currency issues etc that shouldn't be a long-term problem.

 

Anyone have any more specific thoughts about YNDX and why it'll be a winner?

 

http://www.bloomberg.com/news/articles/2015-09-14/russia-says-google-broke-antitrust-laws-sending-yandex-soaring

 

Honestly, Google gaining shares from 34 to 42% is very close to a dagger in the investment thesis for me.  I understand that the Russian government will likely protect Yandex.  But I pay up for great businesses because they exhibit winner take all characteristics and operating leverage as the revenue scales.  The fact that Google can throw some resources at this and gain market share is very alarming to me.  Previously, I had seen figures in the 60s for Yandex and ceding that share to 50% is likely too much for me. 

 

Yeah I agree with you. A company like YNDX that needs to resort to bringing in the regulatory guns to protect their market share is kinda alarming. GOOG seems to be winning on its merits...and for an industry that lives by innovation and dies by innovation - it means something.

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  • 4 months later...

FY15 out and it didn't look especially pretty, not that anyone expected it to be pretty. Similar to for example Arcos Dorados in Brazil, this is made much harder by the fact that currencies have had such a big impact on the results over the past years. But since it seems practically impossible as an outsider to quantify how big of an impact they're having, it's tough to get much conviction behind the investment idea.

 

Other cost of sales, incl. Moscow office USD-denominated rent, increased 52% for the year, followed by SG&A increasing 49%. Sales were up 18% in RUB, guiding +12-18% for FY16. Growth is nice in the macro environment they are in, but the growth in costs is absolutely huge. Leaving aside whether they can be the winner in Russian internet (search mkt share now 57.3%, up 20bps from Q3), to make this investable I think you really need high conviction that they will eventually get back to the +35% EBIT margins.

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Adjusted for stock comp, YNDX generates $60m of free cash flow.. Is that worth $4 billion?

Feels fully-priced to me..  Feels like a fair price for this business is closer to around $6 / share..

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Adjusted for stock comp, YNDX generates $60m of free cash flow.. Is that worth $4 billion?

Feels fully-priced to me..  Feels like a fair price for this business is closer to around $6 / share..

 

Absolutely. If one has a great handle on the currency aspect of this, how the ruble will do in the future and how big of an effect it will have on Yandex (and I imagine it is big, as it seems to affect rent, SG&A, stock comp etc), then superb. For the current price though as Grey512 says, there really must be a big turn for better in the future to get compensated for the risks.

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Look, I mean, let's say cash flow is $120m and not $60m, thanks to some hypothetical tailwinds such as the USD/RUB rate going from 77 back to 50s or 40s, and some incremental cost-efficiencies.. You're still left with a 3% cash flow yield. Not entirely enticing. Not a lot of margin of safety here.

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I agree. But I wouldn't necessarily look at Yandex from today's perspective in the sense that I want, say, 10% FCF yield now. Idk if it's a good comparison, but the investment case for Yandex that I can find any interest in is the fact that it's supposed to be the winner in a market that has massive growth runway (digital advertising something like $2b vs $60b in U.S., internet penetration just above 50% vs 80-90% in most EU countries etc) ahead, and that combined with scale efficiencies you get something interesting. So, if it's attractive, it's probably attractive due to the long-term aspect.

 

But I agree with you. I haven't touched Yandex and I don't see it in my portfolio at least in the short-term. Too many negatives and uncertainties compared to the upside from current price even if majority of the good things happen.

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Look, I mean, let's say cash flow is $120m and not $60m, thanks to some hypothetical tailwinds such as the USD/RUB rate going from 77 back to 50s or 40s, and some incremental cost-efficiencies.. You're still left with a 3% cash flow yield. Not entirely enticing. Not a lot of margin of safety here.

 

They were doing almost $300M in FCF in 2013 (at USD/RUB ~32), and sales have grown 50% since then (in RUB). Not predicting the currency appreciates significantly in real terms but one must not underestimate its impact on NI & FCF when a huge portion of the cost structure (competitive salaries and rent) and capex is USD-denominated

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