Yandex Enters The Cloud Market: Better Late Than Never

| About: Yandex N.V. (YNDX)

Summary

Yandex will provide IaaS solutions to Russian companies.

According to the forecasts, the cloud market in Russia will double in the next three years.

Current financial conditions will hardly allow Yandex to win market leadership rapidly.

In early May, Yandex (NASDAQ:YNDX) registered its new subsidiary - "Yandex Cloud Technologies." Within the framework of the new direction, Yandex intends to focus on providing IaaS solutions to Russian companies. This step is right and justified, but, in my opinion, it should not be overestimated.

Click to enlarge

The Russian cloud-based services market, like the Chinese market, is developing with a certain time lag relative to advanced countries. The reason for this is, first of all, the market immaturity due to the poor understanding of the advantages of such solutions for business, revealed by the local company management. Secondly, there's a lack of serious players capable of providing stable high-quality services.

The structure of the Russian cloud market is an evidence of its youth. According to DIRECTUM - the local consulting company, the demand for IaaS in Russia is substantially higher than for SaaS.

Paradoxically, the financial difficulties in 2015 triggered the development of this industry in Russia. The depreciation of the ruble and budget cuts forced many companies to abandon development and maintenance of their own information infrastructures. As a result, the Russian cloud market grew by 25% in 2015, reaching 16.5 billion rubles. Moreover, it is anticipated that its volume will double by 2018, reaching 32 billion rubles.

Dollarwise, these figures don't seem impressive at the current exchange rate. But the expected cloud market growth rate exceeds Yandex's current revenue growth rate, which makes the market entry potentially profitable for the company.

Click to enlarge

Source of data: iKS-Consulting

The legislative issue also could be a tailwind for Yandex. According to the law N152-FZ "on personal data," all telecommunication companies providing their services in Russia shall store and process personal data on the country's citizens within the Russian Federation. This forces foreign players to use the services of the local data centers that do not always allow them to guarantee an adequate level of service. In addition, it reduces the profitability of the business.

In general, it is worth noting that the Russian authorities' intention to increase the control over information may deter foreign companies from large investments in the Russian IT industry. Again, this is an advantage for Yandex.

On the other hand, despite the correctness of the decision to provide cloud-based services, it is difficult to expect that Yandex will quickly take a significant share of this market. Cloud-based services require large and long-term capital investments, and the current financial condition of Yandex does not allow to rely on aggressive infusion of financial resources to this industry. The lion's share of computer equipment is purchased for dollars, and, given the weak prospects for the Russian ruble, the situation will not improve in the near future.

YNDX Free Cash Flow (Quarterly) Chart

I have no doubt that Yandex's decision to enter the Russian cloud market is a good one. On the other hand, I doubt this decision will dramatically improve the company's financial performance in the near future.

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.