This analysis of Yandex (YNDX) was provided to TradingIPOs subscribers in advance of its IPO. On May 14, the company announced that its initial public offering of 52.2 million American depositary shares was priced at $25 per ADS.
Yandex plans on offering 57.7 million shares at a range of $20-22. Insiders will be selling 40 million shares in the deal. Morgan Stanley, Deutsche Bank, and Goldman Sachs are leading the deal, Piper Jaffray and Pacific Crest co-managing. Post-IPO, YNDX will have 323.3 million shares outstanding for a market cap of $6.79 billion on a pricing of $21. IPO proceeds will be used for general corporate purposes.
The two founders will own 49% of YNDX combined post-IPO. Each has agreed to a one year lock-up of their shares.
From the prospectus: "We are the leading internet company in Russia, operating the most popular search engine and the most visited website."
YNDX is a Russian search engine, the largest Internet company in the country, with 64% of the search traffic in Russia; Google (GOOG) is number 2 at 22%. YNDX's share of the market has grown from 55% in 2008 to 57% in 2009, to 64% in 2010, and to 65% in the first three months of 2011. In March, the YNDX website (yandex.ru) attracted 38.3 million unique visitors. YNDX also operates in Ukraine, Kazajhstan and Belarus.
In addition to broad search, YNDX offers local search results in more than 1,400 cities. It also offers specialized search resources including news, shopping, blogs, images and videos, much like Google. YNDX also offers an online payment system at yandex.money.
Revenues are derived from online advertising. Currently the bulk of revenues are from text-based advertising, with display advertising making up a smaller amount. YNDX does not utilize any pop-up ads. Much like Google, YNDX also serves ads on third party websites that make up the YNDX ad network. Third party site ads accounted for 12.5% of 2010 ad revenues.
In the first quarter of 2011, YNDX served ads from 127,000 advertisers. Just 3% of revenues are from advertisers outside of Russia.
Much like the selling points for Baidu (BIDU) when it came public, YNDX notes that the Russian economy is expected to grow faster than the global economic rate, and that Russian Internet penetration, while significantly lagging behind developed countries, is expected to grow faster -- leading to the conclusion the Russian online/mobile advertising market looks poised to "outgrow" more developed countries.
YNDX does serve ads on Facebook.
Lest we forget, Russia is not yet a free country. This little tidbit hit the newswires not too long after YNDX filed for this IPO:
Yandex, which last week announced its intention to list on NASDAQ, says it has been forced by Russian authorities to hand over financial information about an anti-corruption blogger to Russia’s domestic security agency, the FSB.
Alexei Navalny, who operates the RosPil whistle-blower Website in Russia, had complained on his blog that some financial contributors were receiving threatening telephone calls over their support for the site. Contributions through Yandex to RosPil are made using "Yandex Money." Yandex has now confirmed that it provided information about both Navalny and his contributors after being approached by the FSB.
A cozy relationship with the Russian government means that YNDX has (and one can infer will again) given the government personal information about people who have blogged anti-government rhetoric.
Inflation is always an issue in Russia; the annual inflation rate has been 12% in 2008 and 9% in each of 1009 and 2010.
$1.25 per share in cash post-IPO. Its fourth quarter is seasonally the strongest.
In 2010: $440 million, a 43% increase over 2009. 79% gross margins. Strong 40% operating margins. Tax rate appears to be 25% of operating income. Net margins after interest income and taxes of 30%. EPS of $0.42.
In 2011: Revenues are on pace to grow strongly yet again. $650 million in revenues, nearly 50% growth from 2010. Easy first quarter 2010 comparables are helping to accelerate the growth rate here. Operating margins look to improve slightly to 41%, net margins of 32%. EPS of $0.64. On a pricing of $21, YNDX would trade 33 X's 2011 estimates.
Way too cheap, 33X 2011 estimates with a 50% growth rate and dominant market position in a sector growing swiftly.
A quick look at BIDU and YNDX:
BIDU: $45 billion market cap. currently trading 22X 2011 revenues and 48X '11 estimates. $5 per share in cash on the books expected to grow revenues 65% in 2012.
YNDX: On a pricing of $21, $6.79 billion market cap. Would trade 10X 2011 revenues and 33X 2011 estimates. $1.25 per share in cash post-IPO, with an anticipated 50% 2011 revenue growth rate.
Now this is what a foreign Internet leader looks like: Strong sector leadership in what should continue to be a fast growing sector going forward. Notably taking market share away from competitors (which include Google) annually the past three years is very impressive. Strong margins and growth, easy recommend in range here. Dominant market leader, everything you look for in an IPO coming at a very reasonable multiple.