The Bear Case for Russia's Yandex NV: How Does It Hold Up?

With Russia in the headlines, Yandex NV shares have been taking a beating. Is it warranted?

Mar 22, 2014 at 12:00PM

There's something rotten in Russia.

Or at least that's what a novice investor might be led to believe if they hold shares of Russian-based search-engine Yandex (NASDAQ:YNDX). The company's shares are 31% off their January highs, helped in no small measure by political turmoil in Ukraine's Crimea region.

I bought shares of Yandex last year, but with all the uncertainty surrounding the country, it's worth asking the obvious question: Is it time to sell Yandex?

Screen Shot

Source: Yana Amelina, via Wikimedia Commons. 

Every year around the beginning of spring, I like to review all of my family's stock holdings. This year, we have 32 different positions, and since I'm loathe to sell stocks, I like to carefully examine the bearish case for each stock and see how it makes me feel.

Below are the two biggest cases to be made against Yandex and how I feel about them.

"You shouldn't be investing in such a politically unstable area."
There's no question that Russia and its host of previous bloc countries have had a tumultuous past. In 2008, Russian forces moved into the disputed area of South Ossetia in Georgia, and recent developments in the Ukraine have had the international community on heightened awareness.

Should any sanctions be put in place against Russia, its economy could suffer, which could lead to less money being spent on ads from which Yandex derives most of its revenues.

My response: If you've got a long-term investing horizon, you can wait for this to resolve itself.
I'm not coming down on either side of the recent conflicts. If I were a short-term investor, these events would definitely give me pause and make me reconsider how wise it is to invest in the Russian economy.

But the fact of the matter is that when I buy shares of a company, I like to buy with my eyes on the long-term time horizon -- meaning years and decades, not weeks and months. Given that time horizon, I'm comfortable continuing to hold shares of Yandex, as I believe this simply gives more time for these disputes to settle themselves.

"Yandex will be crushed by its competitors."
Yandex surely isn't the biggest kid on the block. In terms of the global search engine game, Statistia reports that Google (NASDAQ:GOOGL) has a 89% market share. The next closest competitor focused solely on search is Chinese-based Baidu (NASDAQ:BIDU).

While Google is a serious competitor to any search engine worldwide, it's worth noting that investors might want to keep their eyes on Baidu as well. Though the company is tailored more toward China and other Southeast Asian countries, China shares a 2,600-mile border with Russia as well.

My take: Yandex seems to be doing well in its core markets.
One thing to understand about Yandex is that, right now, it has no intentions of being like Google, which has operations in most of the world's countries. It's far more instructive to see how Yandex is doing in its core Russian and former-bloc states. And when we look there, signs point toward the company gaining and maintaining favor.

Yndx Share

Source:, Yandex conference call, via SeekingAlpha. 

The company only recently began competing actively in Turkey, so the low market share isn't too concerning. And Yandex also has a considerable presence in Kazakhstan, but I couldn't come upon accurate market share numbers.

My Foolish takeaway
Just last week, I wrote an article about how Baidu was the best buy among major global search engines. Though I still believe that Baidu is a solid buy, there's no denying that Yandex continues to become a more and more enticing purchase.

As it stands today, the company trades hands at 27 times earnings, and 34 times free cash flow. While those seem expensive, the company is growing rapidly in markets where Internet penetration is just picking up, and economies are expected to grow at decent clips over the coming years.

Needless to say, I'll be holding my Yandex shares.

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Brian Stoffel owns shares of Baidu, Google, and Yandex. The Motley Fool recommends Yandex. It recommends and owns shares of Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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