Wednesday, May 25, 2011

Should You Bet on Yandex?

2011's biggest initial public offering (IPO),Yandex (NASDAQ: YNDX) -- Russia's version of Google (NASDAQ: GOOG) -- went off without a hitch Tuesday -- but did not receive as much media attention as LinkedIn's (NASDAQ: LNKD) IPO.

Yandex -- the name stands for Yet Another Indexer -- dominates the Russian market for search. Tapping Russia's math and engineering talent, LiveInternet reports that Yandex's search engine is so successful that it now controls 64% of the Russian market nearly triple Google's 23%. Yandex started in 1997 and beat Google to market -- it entered Russia in 2005 -- with maps, news search, and Web mail.

And the Internet advertising market from which Yandex derives 97% of its revenues is large and growing fast. Globally, Internet advertising will contribute to 37% of 2011's global advertising growth according to Group M -- and will take over newspaper spending in 2012. And the Russian online advertising market is expected to grow even faster than the global market -- at 27% annual rate between 2011 and 2015 as Russian Internet penetration climbs from 30% to 70% according to Russia’s Public Opinion Foundation.

Yandex's financial performance has been solid. Its 2010 revenues were $440 million and it earned a profit of $134 million or 44 cents a share. Based on its closing price of $38.84, up 55.4% on its first day of trading, Yandex's Price/Earnings ratio is a steep 88 (although that pales in comparison to LinkedIn's P/E of 584 after its first day of trading.)

Before getting into whether Yandex's stock price could rise further, it's worth pointing out that the company faces risks due to Russia's attitude towards corporate governance. For example, reported that Yandex coughed up personal information to Russia’s security service of Yandex Money users who made electronic contributions to a Russian anti-corruption organization.

If that kind of thing doesn't both you, the next question to consider is whether a P/E of 88 can be justified by Yandex's future growth rate. Between 2006 and 2010, Yandex's net income grew at a 36% annual rate. If you think it can more than double this growth rate, then a P/E of 88 might be justified, otherwise the implied Price/Earnings to Growth Ratio of 2.67 (where 1.0 looks fairly valued) appears pretty expensive to me.

I would keep your eye on this equity because it is the dominant player in a fast and rapidly-growing market. But I would wait to buy the shares after seeing whether it can grow into its lofty valuation. 


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