In today’s inflated markets, it’s been rare to find stocks that appear to be cheap. When looking at Yandex financials, investors would see growth in both the top & bottom line as operational efficiency has been persistent in Yandex’s Eastern European regions. However, due to the geopolitical uncertainty in these same regions, Yandex stock price has been punished to depressed levels. As a result, long-term investors who are willing to let tensions die down will be rewarded.
Growing metrics
During Q2, the number of search queries on Yandex grew 21% YoY, a figure similar to the Q1 YoY growth rate. As seen below, top line grew by 32% YoY (or 29% if loss from foreign exchange rate is considered).
Operating income only grew 12% as the company also saw its cost structure rise due to the hiring of personnel. Operating margin came in at 30%, down from the 35% a year ago. With the focus on expansion into international markets, such as Turkey, the company expects to grow the current ~5% market share in the country and report first revenues later this year. With growing revenue streams and a rise in costs to match some of the top-line growth, I expect Yandex to keep operating margin around the current range of 30%.
Net income was down 18% YoY primarily from the foreign exchange loss recorded on the depreciation of the USD. Adjusted for the foreign exchange discrepancy, net income rose 9% YoY. As a result of foreign exchange loss and the rise in employee costs, Yandex profit margin ended up being 20% (compared to the 32% the prior year).
Despite the weaker display of growth in Q2, when compared to prior quarters, Yandex expects top-line growth to be in the 25-30% range for the remainder of 2014.
Indication of being undervalued
Yandex is down 30% thus far in 2014. During this time, Yandex has repurchased $218M of its stock or about 4% of shares outstanding (below). Additionally, after the company completed the original share buyback program, the board authorized an additional 3M shares to be repurchased. At current prices, this would cost Yandex around $100M. The company has $1.4B in their cash balance so expect management to continue share repurchases at these deflated levels.
Comparable valuation
When compared to Baidu and Google, Yandex shows that it matches the other search engine companies with respectable growth and competing margins.
Yet, Yandex trades at less than 25x earnings when the others are given higher premiums. If Yandex was to trade at the same earnings multiple as Google, it would present a 25% upside (or about $38/share). I think investors should be adding Yandex at any level below $30.
Risks
Geopolitical
Investors must remember that an investment in Yandex could be considered “dead money” until the tensions in Russia are resolved. This will take time, especially with economic sanctions being exchanged between the West and Russia. However, for longer term investors, this geopolitical uncertainty has provided an opportunity.
FOREX
Foreign exchange loss in Q2 2014 was RUR 625 million (~USD 17M), compared with a foreign exchange gain of RUR 35 million (~USD 1M) in Q2 2013. With operations mostly in Russia, Yandex financials will be fluctuated according to the RUR/USD rate.
Conclusion
As a result of the geopolitical tensions between Russia, Ukraine and the western nations, Yandex has become undervalued. The company boasts strong growth that should continue with the Turkish expansion, strong margins that are expected to remain constant and an increase in share repurchase to inject confidence in the stock. When compared to other leading search engine firms such as Baidu and Google, Yandex receives depressed valuation ratios. When tensions ease, patience will prove to be a virtue for Yandex shareholders.
