Tags: Yandex | YNDX | Russia | Google

David N. Frazier: Political Unrest in Ukraine Presents Buying Opportunity for Russian Internet Company Yandex

By    |   Friday, 18 April 2014 07:54 AM

After rising a whopping 165 percent from June 14, 2012 to Jan. 9, Yandex (YNDX), Russia’s version of Google, fell sharply during the past six weeks in response to investors’ concerns that a war might soon begin between Russia and Ukraine.

Although such a war could develop, I would argue that there’s a very small probability of that happening.

There’s no reason for Russia to start a war with Ukraine, because it has already gotten, or is in the process of getting, want it wants from Ukraine — Crimea and, potentially, eastern regions of Ukraine seceding to Russia.

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Ukraine isn't in a position to start a war with Russia because its army of approximately 130,000 soldiers is much smaller than Russia’s army of 845,000 troops. And, recent comments made by government officials in the United States and Europe indicate that those officials wouldn't support Ukraine with any of their country’s troops or weapons.

With diplomats from the United States, the European Union, Russia and Ukraine agreeing Thursday  that Russia and Ukraine will refrain from any further violence, intimidation or provocative actions, and that both of those countries will disarm any illegally armed groups in Ukraine, I expect hostilities there to dissipate substantially during the coming weeks.

I expect stock market investors and speculators who’ve been following Yandex to begin to focus more of their attention on the company’s operations and financial outlook than on the political unrest in Ukraine. Such a development would likely bode very well for the future direction of Yandex’s stock. That’s because financial market participants, in the aggregate, are currently undervaluing the company’s stock substantially.

For example, my research indicates that Yandex will be able to grow its net earnings per diluted share at an average annual rate of at least 30 percent over the next 3-5 years. Yet, the company’s stock closed at an earnings multiple — P/E ratio — of only 24. Hence, YNDX closed Thursday at a P/E to Earnings Growth Rate (“PEG”) ratio of only 0.81: (P/E of 24 divided by Earnings Growth Rate of 30 percent equals 24/30, or 0.81).

The fact that Yandex’s PEG ratio is considerably less than 1.0 indicates that financial market participants are undervaluing the Russian company’s growth potential — that those investors and speculators have been valuing Yandex at a price that is less than the likely growth in the company’s earnings per share over the next few years. And, that low PEG ratio suggests that YNDX closed Thursday at a bargain price of $29.95.

Meanwhile, Yandex is very strong financially, with the company’s cash alone covering all of its financial obligations by a ratio of 1.4-to-1 as of Dec. 31, 2013. That favorable financial condition places Yandex in a position to acquire new competitors that might enter the Russian Internet search engine market and/or to bring new products/services to the market.

For those of you who aren’t familiar with Yandex, the company is one of the larger Internet companies in Europe and the leading provider of Internet search technology in Russia.

According to comScore, a worldwide provider of information regarding persons’ activities on the Internet, Yandex’s Internet sites attracted 66 million unique visitors in Russia, 13.8 million in Turkey and 102.1 million worldwide in January 2014. Meanwhile, the company’s home page accounted for 76 percent of the Russian Internet audience during that month.

In addition to Russia and Turkey, the company’s search engine is also used extensively in Ukraine, Belarus and Kazakhstan.

Like Google, Yandex generates the majority of its revenues from online advertising, with those advertising revenues accounting for 97 percent of the company’s total revenues during each of the past three years.

During 2013, the company collected revenues on more than 460,000 advertisements that were placed on its web sites. That compares to approximately 350,000 advertisements that Yandex serviced during 2012.

In addition to the company’s core search engine, Yandex also offers the following specialized search services:

  • Yandex News: The most visited online news aggregation service in Russia, providing a comprehensive overview for Russian, Ukrainian and Turkish audiences. Yandex News aggregates and presents local, national and international news from more than 5,800 news sources worldwide.
  • Yandex Market: An e-commerce gateway service that provides product information, price comparisons and consumer-generated reviews of products and online retailers. Yandex Market features more than 60 million offerings in approximately 150 product categories from more than 14,000 participating retailers.
  • Kinopoisk.ru: The largest Russian language website that’s dedicated to movies, television programs and celebrities.
  • Yandex Mail: An email service that provides users with fast and easy access to their email accounts.
  • Yandex Disk: A cloud-based storage service that enables users to upload, store and share files in various formats and sizes. Users can store photos, videos or documents online so that they can be accessed at any moment from a personal computer, laptop computer, tablet or smartphone.
  • Yandex Maps: The most popular map service in Russia, providing high-quality, detailed maps of more than 1,100 cities and towns in Russia and more than 220 cities in Ukraine, Kazakhstan and Belarus, as well as a detailed map of Turkey. The mobile version of Yandex Maps enables users to determine their current location, to find a nearby business, to monitor road traffic congestion along particular routes and to determine the best routes based on real-time road traffic congestion updates.
  • Yandex Taxi: One of the more popular online taxi booking services in Moscow and other cities across Russia, Yandex Taxi is used by approximately 200 Russian taxi companies that operate approximately 20 thousand cabs. The service processed 3.5 million orders during 2013.
  • Yandex Money: A secure online payment system that offers an easy way for online shoppers to pay for goods and services via the Internet. Yandex Money has more than 17.5 million registered users and processes more than 150,000 payments daily for thousands of participating merchants, including a wide range of well-known Russian and international companies. (During July 2013, Yandex sold a 75 percent interest in its Yandex Money service to a Russian bank).

With my research and experience indicating that the worst is over regarding the recent political unrest in Ukraine, I encourage long-term investors, stock market speculators, and short-term traders to allocate a portion of their financial market assets to Yandex at prices up to $32.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the president and chief market strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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With my research and experience indicating that the worst is over regarding the recent political unrest in Ukraine, I encourage long-term investors, stock market speculators, and short-term traders to allocate a portion of their financial market assets to Yandex (YNDX) at prices up to $32.
Yandex, YNDX, Russia, Google
Friday, 18 April 2014 07:54 AM
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