Yandex Is Still Going Through Tough Times

| About: Yandex N.V. (YNDX)

Summary

The observed growth of Yandex's quotations is, apparently, associated with the overall positive mood in the Russian market due to the oil strengthening.

The EBITDA margin of the company is under pressure.

Yandex.Taxi is getting ready for a long price war against Uber, and not necessarily the former will win.

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First of all, I would like to emphasize that analyzing the prospects of Yandex's (NASDAQ:YNDX) shares, we actually do the forecast of the whole Russian stock market. In its turn, it significantly depends on the oil price. Obviously, you should still take into account the perspective of the ruble's value. However, since this characteristic is almost in a linear relationship with the oil price, it can be left out.

In order to support this logic, I enclose the joint price graph of Yandex's shares and Brent oil barrel, where even the minimum and the maximum peaks match:

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I would like to specify that I am skeptical about the current oil price. At least, I don't believe in its long-term stability. In my opinion, the market ignores accumulated record oil stocks that are still there. According to the most recent OPEC figures, the oil stocks in OECD increased by 5.5% YOY and by 0.8% QOQ in Q1 2016, reaching 4,639 million barrels. I believe OPEC will continue to increase the oil production in an effort to gain the market share, and in the meantime, the current price already implies a slowdown in the decline of production in the United States.

So for the next six months, the general foundation of the Russian market seems shaky to me. And now about Yandex.

Yandex's revenue in Q1 2016 exceeded the expectations of analysts, demonstrating growth of 33.5% YOY (the highest YOY growth rate over the last seven quarters). In Russia, as in the rest of the world, the advertising budgets are increasingly spent not on traditional forms of advertising, but on the Internet advertising. This is a favorable and a long-term factor for Yandex. But the growing competition in this market affects the profitability.

However, to complete the analysis, I will provide the revenue schedule of Yandex in the U.S. dollars. The last quarter recorded a positive growth rate of dollar revenues YOY solely due to the fact that in Q1 2015 Yandex's dollar revenue reached a minimum over the last 10 quarters.

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Source of data: Yandex

The dollar equivalent of revenue is important for Yandex, because the wages of its IT professionals are pegged to the dollar. Over the recent years, the dynamics of the EBITDA margin has been reflecting the above stated.

YNDX EBITDA Margin (Quarterly) Chart

YNDX EBITDA Margin (Quarterly) data by YCharts

Purchasing its headquarters, the company got rid of the lease payments in dollars, but gained the interest payments in this currency. Generally, I believe that EBITDA margin in 2016 will deteriorate due to the devaluation of the ruble and the overall situation in the economy.

My particular attention in Yandex's quarterly report was attracted by the discrete results of Yandex.Taxi service, to which many analysts predict the success of Uber (Private:UBER).

It is difficult to overlook the revenue growth rate of 176% YOY. But the EBITDA margin of this segment became negative. And this, in my opinion, is a direct result of the competitive struggle between Yandex.Taxi and the above mentioned Uber.

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Source of data: Yandex

According to Yandex, Yandex.Taxi service is represented in 17 major Russian cities as well as in Minsk. On the other hand, Uber is represented in 10 Russian cities, but obviously, it will expand. You also should not forget that Uber performs its services in 400 cities in 70 countries around the world. If a Russian citizen abroad enjoyed the services of Uber, then it is logical to assume that on his return to his country, his preferences will not change. In addition, Uber can provide additional discounts to such customers.

Recently, both companies announced the reduction of tariffs in Russia, and in my opinion, this is starting to resemble a full-fledged price war. It seems to me that Uber has higher chances of winning this war.

In my opinion, the growth of Yandex quotations in 2016 is largely associated with the overall recovery in the Russian market due to the oil recovery. In the meantime, Yandex remains in difficult circumstances of adverse economic situation and high competition. In this situation, the best recommendation I can give on Yandex's shares is to "keep" them.

Unless otherwise noted, all charts included are my own.

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.