By Matt Doiron
Tiger Cubs Chase Coleman and Rob Citrone respectively manage Tiger Global Management and Discovery Capital Management. These funds recently filed their 13Fs for the second quarter of 2012 and when they did we noticed that Discovery had more than tripled the size of its position in Yandex NV (YNDX), a Russian search engine. Yandex has also been a major holding of Tiger Global Management for some time. While that fund trimmed its position in the second quarter, it still owned 32 million shares making the $7 billion market cap company the second largest position in Tiger Global's portfolio according to the 13F. The 32 million number was also about ten times larger than Discovery's position (see more stock picks from Tiger Global Management and Discovery Capital Management). As a result, we are taking a closer look at Yandex.
Yandex NV IPO'd in May 2011 and has since fallen 46%, though it is currently trading at over $21 per share and briefly dipped below $17 in June. It is up about 7% this year, roughly even with the Russian focused ETF RSX and well below the NASDAQ's performance (Yandex NV is not one of the top holdings of the RSX, which primarily consists of energy, materials, and financial stocks). Recently Yandex's share of the Russian search market has been up: at the beginning of this month it stood at 60.1% and the most recent data gave it 60.7%. This is not a large increase, but it shows that the company's product is gaining support against Google (GOOG).
In its most recent quarter, the company reported revenue growth of 50% and also increased its margin, bringing growth in net income to 76% against the same quarter last year. Investors seem to acknowledge high growth at the company, as its trailing P/E is 32, but sell-side analysts think that the company is being underestimated. According to its projections, Yandex's forward P/E is 19 and its five-year PEG ratio is 0.7. So on a financial basis, we would say that the company is sound (unless there are corporate issues). Of course, the company is highly exposed to the Russian economy and bears macro risk there - we can see that the stock price exhibits a correlation with oil, and if investors are willing to take that commodity risk they may prefer several low-priced companies in the energy sector.
According to our data Tiger Global and Discovery were the top two hedge fund holders of the stock at the end of June, but others had smaller positions. Christopher Lord's Criterion Capital had the largest stake of these others, with 2.7 million shares (see more stock picks from Criterion Capital). Standard Pacific Capital and Emerging Sovereign Group - the latter fund also run by a Tiger Cub, Kevin Kenny - also had positions in the stock.
Yandex's closest peer would be its competitor Google (though the two only compete on Yandex's home turf - and historically Russians tend to do quite well against invaders). Google's larger size makes achieving similar growth rates difficult, and in its last quarter it "only" grew its earnings by 11% compared to a year ago. However, Google is priced more cheaply at 20 times trailing earnings and 14 times forward earnings.
Only looking five years out, where Google's PEG is 1, does Yandex start to look like a better buy. Yahoo (YHOO) is more of an Internet portal, and has not been growing recently, but trades fairly cheaply with trailing and forward P/Es of 17 and 13, respectively. We would also compare Yandex to search engines in other developing countries. Baidu (BIDU) has an eerily similar valuation profile: trailing P/E of 32, 70% earnings growth in its most recent quarter compared to the previous year, forward P/E of 19, and five-year PEG of 0.7. In this case, take your pick: China or Russia? Our point of view is that Yandex is a buy and in particular could make for an interesting pair trade with RSX. This would cancel out any of the search engine's exposure to oil, freeing investors to invest in domestic energy companies, and over time our expectation is that Yandex will outperform other Russian companies.