Russian search engine Yandex (NASDAQ:YNDX) and Chinese search giant Baidu (NASDAQ:BIDU) are often compared against each other and called "Googles" of their home countries. However, in my opinion, these companies, and, most importantly, the environments in which they operate, are qualitatively different, and not in favor of Yandex.
Evaluating the current price level of shares of Yandex, Baidu and even Google (NASDAQ:GOOG) (NASDAQ:GOOGL) through the mutual comparison of their respective P/S ttm ratio values, we draw the expected conclusions - Yandex is trading cheaper than others which, in my opinion, corresponds to the internal potential of the company and the market in which it operates.
However, if you compare the mentioned companies in terms of profitability, the situation will change drastically. The Yandex P/E ttm ratio is almost equal to that of Google and two and a half times higher than Baidu. In my opinion, there is a definite imbalance of prices: or Yandex is too expensive or Baidu is undervalued.
Target markets potential
According to the estimates of the local Internet resource LiveInternet.ru, Yandex accounts for 57.3% of the Russian search market (including mobile). In the meantime, according to global statistics resource StatCounter, as of March 2016, the search engine Baidu accounts for 79.52% of the Chinese market. Moreover, while in the past 12 months the market share of Yandex decreased by 2.7%, the Chinese search engine increased by 7% in the local market during the same period. But even this is not the main point.
According to the January survey by the consulting internet-company WeAreSocial, the internet penetration rate in China is 49% and in Russia 72%. Hence, Russia's indicator is significantly above the average. In my opinion, this indicates the approximation of a certain plateau in the quantitative internet penetration growth in Russia. The Chinese situation is diametrically opposite. Given the current structural transformation of the Chinese economy, which involves the growth of the service sector and high-tech industries, I believe the level of Internet penetration in the country will grow at a sufficient rate in the coming years. It will boost the development of Baidu.
It remains to add that for the year 2016 the forecasted China's GDP growth is 6.5%, while Russia's GDP will reduce by 1.3 - 1.5% according to the Central Bank. In my opinion, the situation may be even worse for Russia.
Google left the mainland Chinese market in 2010 which allowed Baidu to develop freely.
For the moment, the situation in Russia is as follows. On March 14, 2016, the Moscow Arbitration Court upheld the decision of the Federal Antimonopoly Service on the case of abuse by Alphabet (Google) of its dominant position in the market of the pre-installed application stores in Android operating system within the Russian Federation.
Let me remind you that in accordance with FAS rules Google must:
- Remove the compulsory pre-setting of the search engine Google on mobile devices.
- Exclude from agreements its anti-competitive requirements restricting the installation of applications from other developers.
- Inform the users of Android OS mobile devices distributed on the territory of the Russian Federation on the deactivation of the pre-installed Google applications, the search engine change in Chrome and the possibility of installing a different search widget and other applications.
As we can see, such a requirement cannot be compared with the total ban of Google in China. Ideally, a user who buys an Android-based smartphone in Russia will determine himself which search engine or mail service to use. However, if this user already has a Gmail account and is used to GoogleMaps, will he move to Yandex services? This idea can be developed further. As of March 2016, Google Translate supports 103 languages at various levels. Yandex supports about 60 languages. The number of available applications in the Google Play Store on November 2015 reached 1.8 million. Yandex does not disclose information on the number of applications available in Yandex Market, but it is clear that it is much less than Google.
In my opinion, it's late for Yandex to vindicate its competitive rights - a substantial part of the Russian market already belongs to Google.
In March 2016 the stock price of a Yandex share fluctuates around $14-$15. Its quotations are affected by the Russian stock market situation, which in its turn is strongly influenced by oil prices fluctuations. Perhaps in the future the Russian Government will again support the competitive position of Yandex and it will have a short-term positive impact on the company. However, while Google is not completely banned in Russia, Yandex by itself is not a company that may be attractive for a long-term investment. It's better to buy Baidu shares.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.