The "Google of Russia" is already showing signs of strong demand and solid aftermarket trading. Yandex (YNDX) is well established and is benefiting from a market realization that some geographies - like China with Baidu (BIDU) and Russia with Yandex - represent differentiated investment opportunities despite the dominance of Google (GOOG) in countries speaking Romanic languages.
In the past year we've seen the rise of Russian internet interests, at first though the aggressive investing of DST in companies like Facebook and then in the IPO of Mail.ru, which was warmly received and now trades at a $7B market capitalization. Russia has always had a strong backbone of scientific knowledge and training in mathematics. This may not have translated into making great automobiles or watches, but the country has found commercial application in internet technologies.
Yandex has managed to fend off an attack from Google in its home market of Russia and has been expanding and gaining share in adjacent markets like Ukraine, Kazakhstan and Belarus. Google, however, still has a lead in those three markets. Based on the size of the available market for Yandex and its growth rate, it's safe to say that it will represent the largest single player in the European market and be abel to rival countries like India, China and Brazil.
From a competitive standpoint, the two that stand out are Mail.ru from within and Google from outside. Competition is driving an expansion into online shopping, mail, e-commerce, maps and related services to drive more clicks, users and market share. In this area we expect all three firms to have the desire and resources to invest heavily. Russian internet users will enjoy robust new services over the next few years. Yandex hopes to leverage its position in maps and traffic to be a leader in the very small but emerging mobile internet in Russia.
The revenue levels, growth and cash flow are all very good. For 2010, revenues grew over 40% to reach $440m, on which the company was able to generate an impressive $133m (30%) in free cash flow. For the March 2011 quarter, top line growth improved further to 65% YoY.
So how high is YNDX going to go? We've attached a peer analysis table showing some of the comparable companies. Yandex has better than average growth and is among the highest margin companies in the group. The closest comparable companies, in our opinion, are Mail.ru and Baidu. That would suggest something like a 25x sales number. At $25 Yandex would be trading at just 6x sales, which we don't expect to see. Any price under $50 would be attractive and $100 is not out of the question.
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One mitigating factor is that the offering size is much larger (8x) than that of LinkedIn (LNKD), which creates less of a supply/demand squeeze. Still, there is solid value in Yandex at $50 or below. There is some political risk in Russia but it hasn't hurt Mail.ru, which is trading at 26x sales. Yandex looks like it may price today and should be a very bright spot in an otherwise dull market.