Yandex: Prospects Are Looking Dimmer

| About: Yandex N.V. (YNDX)

Summary

The search market remains the key source of Yandex’s revenue.

Yandex’s share of the Russian search market has dropped by 1.1% in 2016.

Yandex’s share of the Russian mobile search market has decreased by 0.9% in 2016.

In his comments to the Q2 financial report of Yandex (NASDAQ:YNDX), Arkady Volozh, the company's Chief Executive Officer, said the following:

We posted strong results in Q2'16 with notable contributions from our Taxi, Market, and Classifieds business units.

It cannot be denied there are really good services among Yandex's products, the revenue from which demonstrates relatively high growth rates. However, in this post, I would like to draw attention to the segment that is currently generating the bulk of the company's revenues and will be generating it in the near future.

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The latest Yandex financial report is notable for the fact that for the first time it contains discrete financial information on the key activity areas of the company.

Considering the dynamic pattern of these segments in the structure of the total revenue of Yandex, it can be concluded that there are no significant changes in the internal structure of the company's revenue.

Over the last three quarters, the share of the "Search and Portal" segment consistently amounted to approximately 89%. In my opinion, given the current trend, this figure is unlikely to change substantially in the near future.

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Source of data: Yandex

Analyzing the EBITDA margin of these segments, we also come to the conclusion that the main source of Yandex's revenue is "Search and Portal". Other segments show either a low or even negative level of profitability. Moreover, there is no tendency towards a change in this situation.

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Source of data: Yandex

These findings are unlikely to surprise anyone - Yandex is, first and foremost, a search portal, and it is clear that the bulk of its revenue and profit is generated by contextual advertising. However, it is very important to understand that, despite the development of Yandex's adjacent services, it is the search market that provides the bulk of the company's revenue, and there is no reason to expect that the situation will change in the future. And I believe that this is what threatens the company.

Until the end of 2015, in each quarterly report, Yandex published information about its share of the Russian search market. Interestingly, in the last two quarterly reports, Yandex ceased to publish this information. Why would that be?

The study of the Yandex's search market share was based on the data presented on liveinternet.ru - the Russian internet portal. Having spent a lot of time on this, I was able to find some relevant information, which I have presented in the graph below. It reflects the latest changes in the positions of the key players of the Russian search market.

As you can observe, the Yandex's share on the Russian search market has decreased from 50.2% to 49.1% from December 2015. Over the same period, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has increased its share from 42.5% to 44.1%.

The trend of changes in both Yandex's and Google's shares of the Russian search market has obviously formed. Hence, we can forecast that in about a year these companies' market shares will be equal.

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Source of data: liveinternet.ru

The analysis of the mobile search market alone allows you to come to conclusions that are even more disappointing for Yandex. Over 2016, the gap between the companies has increased - Yandex's share has fallen by 0.9% and Google's share has increased by 1%.

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Source of data: liveinternet.ru

Yandex probably hopes that the restrictions imposed by FAS on the actions of Google in Russia will help the company to strengthen its position on the mobile market. However, I don't think it is possible. Generally, I believe that Yandex is late in defending its competitive rights - a substantial part of the mobile search market in Russia already belongs to Google. Moreover, even having a choice, it is unlikely that the users will start to massively replace Google with Yandex on their smartphones.

Yandex is steadily losing its share of the search market in Russia, and I have no confidence that the development of other activity areas of the company will be able to promptly compensate for this 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.