By David Sterman
U.S. investors are always in search of "the next Google (Nasdaq: GOOG)," hoping to latch on to a stock that can appreciate smartly over many years.
In China, they've already had their Google moment. The country's leading search engine provider, Baidu.com (Nasdaq: BIDU) has seen its shares rise from the low teens in early 2009 to a recent $133, valuing the company at more than $45 billion.
Now, investors are starting to pay closer attention to Yandex.com (Nasdaq: YNDX), Russia's leading search engine. Fears of falling market share have pushed its stock down more than 40% since a post-IPO spike last spring, but those fears increasingly appear misplaced. And the company's $7 billion market value, though not inconsiderable, still appears to sharply discount the prospects of major growth in the years ahead.
While Baidu and Google saw explosive growth right out of the gate, Yandex needed time to gain traction, finally reaching an inflection point in the last few years. Sales grew a modest 14% in 2009 to $295 million, but rose 43% in 2010, 60% in 2011, and should rise another 40% in 2012 and 2013, translating into $1.3 billion in sales. Goldman Sachs sees that figure hitting $1.7 billion by 2014. (Note: If you look these numbers up on your own, the current consensus forecasts on Yahoo Finance are far off the mark, as far as I can tell.)
So why is Yandex's growth finally accelerating? Because major Russian companies are belatedly embracing the Internet as a key part of their marketing campaigns. Goldman Sachs sees Russian online ad spending rising 35% in 2012 and 30% in each of the following three years.
Make no mistake, Google is a formidable player, even in Russia. The company's Android smartphones are becoming increasingly popular and are helping take market share. Investors have been spooked by the fact that Yandex's market share has fallen from 65.7% last May to 61.8% in December 2011, according to liveinternet.ru. Google now has roughly 30% of the market.
Google took share by making it harder for users of its Android software to use any other search engine on its Chrome browser. Google relented on that anti-competitive move about six weeks ago, and Yandex has seen a modest bounce back in market share in subsequent weeks.
That bounce back could also be attributed to a relationship with Samsung, the leading smartphone seller in Russia. Samsung uses its own operating system (known as Bada) instead of Google's Android, and the Yandex search engine is integrated into the system.
Samsung projects 50% sales growth for its phones in Russia in 2012. The newly-launched Microsoft (Nasdaq: MSFT)/Nokia (NYSE: NOK) Windows phones also use Yandex as a default search engine and could help boost share if that joint venture's offerings gain traction. In effect, the Russian market is quickly coalescing between Google in one camp and Yandex in the other.
Goldman Sachs goes so far as to suggest Yandex may soon ink agreements with wireless service providers to have its software pre-loaded onto Android phones. What would be Google's response? "We think Google will likely allow such a partnership on its operating system because opposition may raise further anti-trust investigations against Google," note Goldman's analysts.
Investors are best off assuming that the recent stabilization in market share will be the norm in 2012, and Yandex can simply grow in line with the broader market. That, as noted earlier, should set the stage for 40% growth in each of the next two years and also help Yandex maintain its impressive 45% EBITDA margins. Goldman Sachs sees shares rising from a recent $23 to $30 -- a 30% gain. Deutsche Bank is even more aggressive, with a $38 price target, noting that "shares of Yandex significantly under-appreciate the secular growth."
Risks to Consider: The Russian economy is thriving in part due to robust oil prices. A pullback in this commodity might dampen the Russian economy and consumer spending. Moreover, investors need to track market share trends. If Google resumes its market share gains seen last summer, then investors should head for the exits.
The U.S. and European Internet penetration rates are nearing a peak, and China isn't far behind. Russia remains relatively under-penetrated and should deliver very high growth in the next few years. Yandex.com remains the best way to play that trend.
Disclosure: David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of GOOG in one or more if its “real money” portfolios.