1. Yandex is more than a search engine
Since its launch in 1997, not only has Yandex become Russia’s number one search engine. Beyond its estimated 55% to 64% share of the search market, Yandex is an integrated Internet company leading in such areas as online maps and location based services, news aggregation services, streaming music and online marketplaces. It hosts Russia’s second most popular webmail, video and image portals and offers digital currency platforms.
Yandex has one rival that can match, or hope to surpass its multi-segment performance leadership on the Russian Internet market: Mail.ru Group, another Internet giant that was listed on the London Stock Exchange last year.
2. Yandex is bigger than Google in Russia
After entering the Russian search market in 2001, Google became the second most popular search engine in Russia. Google has stopped gaining market share since 2008, however, despite considerable marketing efforts. In 2010, Google’s position even dropped 1.9 points to 21.5% of the market.
Indeed, there is no evidence that would indicate that Yandex’s leadership in search will be in any way threatened in the foreseeable future, mostly as a result of its strong technological lead which is very much tailored to the specificities of the Russian language. The Yandex brand is also a remarkably well established brand. In the long run, however, anything is possible and Yandex will have to work to maintain its lead.
3. Yandex is very profitable
Yandex revenues are generated almost exclusively (97%) by advertising. Yandex Direct, the company’s auction-based context advertising placement service, controls at least two thirds of the Russian contextual advertising market.
The company broke into profitability in 2003, five years after it was launched. In 2010, revenues amounted to $439.7 million with a net income of $134.3 million.
4. A public version of Yandex will continue to grow
In a foreseeable future, Yandex will likely continue to dominate the search market and benefit from the dynamic growth of the Russian Internet, which totalled 45 million unique users aged 18 and older a month in late 2010 and is forecast to have up to 70 million users by 2014.
The online advertising market has seen some healthy growth in Russia, reaching $729 million in 2010, up 40% from 2009. Growth of this kind is expected to continue to grow over the next years with a corresponding effect on Yandex’s advertising revenues, which grew 66.3% YoY from the Q1 2010 to Q1 2011.
The IPO promises to provide Yandex with additional leverage to maintain its lead against both Google and Mail.ru Group on the domestic market and even perhaps begin developing abroad more significantly than it has up to the present time.
From a stock value standpoint, the main risk lies perhaps not so much in Yandex’s performance momentum than in the current high capitalization of high tech companies around the world. Should these stocks drop more or less sharply after having peaked, a possibility that cannot be totally ruled out in the medium term, Yandex stock will obviously not avoid suffering the same fate.
5. Yandex has risk, Russian style
As a search engine, Yandex, with its strong technology and ongoing R&D efforts, has more strengths than weaknesses. Yet as a leading Russian Internet group, Yandex has obvious weaknesses in the fields of social networking and online games, in particular, despite their proven viability.
In the long term Yandex, much like Google, stands to suffer from indirect competition with social networks, whose popularity “reflects a growing shift in the way in which people find information, get answers, and buy products,” as stated in Yandex’s IPO prospectus
In its IPO prospectus, Yandex mentions a long list of other risk factors. In many respects, the list is a formal exercise in compliance with SEC requirements: some of the risks are real, but they could apply equally to any other important Internet search company and even reflect mundane concerns that any company faces.
In a more ominous note, however, the Yandex prospectus notes that “businesses in Russia can be subject to aggressive actions by well-funded, well-connected financial groups and so-called “oligarchs” seeking to obtain control through the exercise of economic or political influence or government connections.”
This is not merely a warning. The Russian state has already gained a considerable foothold in the company through Sberbank, the national savings bank, which acquired a golden share in Yandex in 2009 – a privileged stake that gives significant control over the Yandex shareholder structure. This arrangement, however, has not prevented the company from successfully developing its services, increasing its user base and growing in profitability in the time since then. As the impending IPO is apparently proceeding with the tacit blessing of the state, it is likely that Yandex will continue its strategic course and success in the foreseeable future.
Government threats could likely take another, less political, form. There has been open talk in government circles about creating a more controlled national search engine that, according to Russian president Dmitry Medvedev in a statement last March,”to channel information to a more civilized place.” It is not clear, however, whether such a search engine would really compete with Yandex or merely be used for the needs of public administrations. The threat — mentioned specifically in the IPO prospectus — is all the more remote in that the project seems far from even getting off the ground.
Can Yandex’s modest presence abroad be considered a weakness? So far, the only moves have been to other Russian speaking countries like Ukraine and Kazakhstan, to name a few. In contrast with Google, Yandex has never made claims to be an international player. It has successfully developed on the domestic or regional market and should arguably be judged, for the moment, at this scale.
6. The Yandex valuation is justified
Given the company’s portfolio of high performance assets, good financial structure and positive outlook, the proposed valuation for the coming IPO, around $6.7 billion, doesn’t come as a much of a shock.
If valued under the same criteria as Google, whose revenues also come primarily from contextual advertising, Yandex’s total capitalization could reach from $4 to $8 billion, according to the calculations of Alexey Kurasov of Finam, a leading Russian financial company, in an interview with Russian business daily Vedomosti.
Finam’s most recent official valuation amounted to $8.3 billion, or $25.85 per share, based on the DCF method as well as comparisons in advanced and emerging countries.
By comparison, Mail.ru Group advanced its valuation to $5.71 billion based on the initial price when it was listed on the LSE last October. Yandex revenues amounted to $439.7 million in 2010 while those of Mail.ru Group reached $324 million. The net income of the two rivals amounted to $134.3 million and $76.7 million, respectively.
7. Yandex won’t upset Google’s global position
Yandex’s domination on the search market is limited to Russia. Even on the neighboring Kazakh, Ukrainian, and Belorussian markets, its market shares average just 25%, 29%, and 39%, respectively.
In 2010, Yandex launched an English-language version, which earned praise for the accuracy of its results. But Yandex still ranks just sixth among search engines worldwide, and it doesn’t show signs of threatening Google’s domination any time soon.
More likely, Yandex will progress in Slavic-speaking territories and in other countries on which Google is not focused and where Yandex already has a good solution for specific language families.
Disruptions, however, can never be ruled out in the fast-paced and ever-changing world of information technology. Ten years ago, who could imagine that Google would leave AltaVista, Infoseek, Go.com, Lycos, Excite, and others in the dust so swiftly? Considering that Yandex’s engineering and innovation potential is not that different from Google’s, who knows what kind of novelties the Russian mathematicians are preparing in their laboratories.
