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kochevnik
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Expert in Emerging Markets with 10+ years of professional investment experience at long-only and hedge funds.
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  • The Tactical Short Case For Yandex

    Elevator Pitch

    Yandex will not live up to elevated expectations for 2nd quarter earnings given seasonal weakness as has already been confirmed by liveinternet.ru stats. Significant share offering following the announcement of results will depress the share price and warrants a short.

    Thesis & Catalyst For Yandex N.V. (NASDAQ:YNDX)

    Although I am longer term bullish on YNDX shares, after a nearly 50% move since last quarterly earnings I have sold my long position and initiated a short. The company in all its likelihood will fail to live up to the hype of investor expectation given seasonal weakness in the second quarter which is confirmed by underlying stats reported by liveinternet.ru. The company hinted as much during its first quarter conference call in reference to long seasonal holidays in Russia. Shorting ahead of possible 2nd quarter earnings disappointment (relative to exuberant expectations) might not be sufficient for most investors. However there are strong indications the company's last remaining PE investors will take advantage of the recent share ramp up to divest their remaining large stake in the business, as they have done earlier this year at around 22.75 (currently trading above 30/share). Needless to say, PE investors have made an absurd amount of money on their Yandex investment and are not price sensitive. Their decision to divest is only limited by the investors' appetite in the shares, which seems high at the moment. I would expect approximately $900m -$1b to come to the market within a couple of weeks of the earnings announcement. This is roughly 10% of total market cap and somewhat higher of the current float. Currently shares are at 30.7/share and could get priced at 26-27 level depending on prevailing market conditions. Tactically speaking the downside is attractive enough to initiate a short in anticipation of such offering. I continue to like Yandex longer term with $35 year-end target and would be covering my short on the offering.

    Valuation

    Short term (within 30 days) target of $26-27 depending on prevailing market conditions. Current share price of 30.7.

    Disclosure: I am short YNDX.

    Jul 16 1:25 AM | Link | Comment!
  • $YNDX: Best Investment Opportunity In Russia. Right Here Right Now!

    I have been following Yandex, the Russian tech company specializing in internet search, from the time of its IPO and have used its products for much longer. Yandex represents a new breed of companies in emerging markets that is extremely innovative, focused and technologically robust allowing it to compete with the industry's giants. The dominance of Yandex on its home turf, with 60+% of internet searches and likely much higher in terms of overall value, has been unparalleled by emerging market standards. Uniqueness of the company in context of EM and robust nature of its tech platform are the two primary reasons why investors should care about the company despite operating in an undeniably wrong investor zip code. The stock is currently priced at $22 with my 4-month target of $28 and $35 by end of 2013.

    Thesis:

    Secular growth opportunity, with Yandex as a pure play on Russian online advertising market, which has been consistently gaining market share, and is expected to grow at 30+% over the next two-three years.

    High quality management with significant stake in the business, which in Russia and EM in general deserves a big premium.

    Robust technological platform helping Yandex to dominate across most platforms and successfully defend market share against industry giants such as Google (btw, operating in the country since 2006).

    Market share gains are possible and are not expected by the investment community. Latest product launches of Yandex.Browser, with current market share of 3.5% can help drive overall market share up from the current 60.3% level.

    Economies of scale will lead to margin expansion over the next 3 years.

    60% return potential on a 12M basis driven by a combination of re-rating and earnings growth.

    Risks:

    Most people when they get to know the company are quite impressed with the results and the management but are concerned about three things:

    • Russia - self-explaining concern for global investors who are unclear about rules of the game, political openness, capital flight, etc.

    My take: I think we all know that Russia is a tough place to do business, which is probably why Russia is so much cheaper than any other EM country right now. However, $YNDX has done its best to eliminate as many risks as possible by listing in NYSE, incorporating in Netherlands and offering best quality of management. If you are not comfortable with Russian risk you can still buy $YNDX and short RSX against it.

    • Competition with Google - "How can one compete with such a global giant, eventually, its dominance will translate into higher market share".

    My take: a big concern last year when Google launched highly popular Chrome internet browser and was gaining market share. Chrome is still the most popular but Yandex has managed to take 45% market share on it. Success of Yandex.Browser will determine how much market share $YNDX will gain back next year.

    • Selling by Tiger Global - "What does he know that we don't" type of concern.

    My take: Can't blame Tiger Global for taking profits and re-sizing its position, from what I heard, their cost base is in low single digits and the position has been quite significant. They have been pretty professional in reducing the stake without causing much of price disruption.

    Valuations:

    Price target: $35 on a 12m time horizon, 60% return potential.

    12m price target is derived based on expectations of $1.2 EPS for 2013 (will need a little bit of help from currency appreciation) and 30x P/E multiple, with expectations of 40% earnings growth and PEG ratio of .75x.

    Final thoughts:

    Yandex is the same age as Google. Hypothetically speaking, if Arkady Volozh happened to start the company in the US instead of Russia, in my opinion, it would be far from clear which company would have emerged as today's Google.

    Disclosure: I am long YNDX.

    Tags: YNDX, GOOG, RSX, Russia, tech
    Dec 20 7:42 AM | Link | 1 Comment
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