Internet bubble 2.0 continued to inflate this week with the IPO of Yandex (Nasdaq: YNDX ) , the "Google of Russia." By raising $1.3 billion, Yandex became the biggest tech IPO of 2011.
Now, unlike peers such as China's Youku.com (Nasdaq: YOKU ) or Renren (NYSE: RENN ) , which have been awarded multibillion-dollar valuations despite having less than $100 million in sales and negative operating income, Yandex's IPO valuation was not outrageous. Valued at $8 billion, the stock was trading for 16 times sales and 34 times EBITDA.
That's not classic deep value territory, but in addition to having a clear record of growing sales and profitability, Yandex is the clear leader in search in Russia. It runs the country's most popular website, and earns double the daily page views of Google.ru, according to findwebstats.com. That's particularly impressive, because unlike in China, where Baidu (Nasdaq: BIDU ) has bested Google (Nasdaq: GOOG ) in part thanks to government meddling, Yandex has come to rule Russia organically. That means its market share should remain stable. Furthermore, Russia is an underpenetrated Internet market. With less than 50% of the country's population online, Yandex stands to benefit from at least a few more years of rapid growth.
Too much of a good thing
Of course, Yandex didn't stay valued at $8 billion for long. Within moments, the stock popped to $35 per share, and traded as high as $39 -- valuing the company at almost $13 billion. And that's where it starts to get outrageous.
At $13 billion, Yandex is trading for 26 times sales and 55 times EBITDA. To put that in perspective, Baidu, the dominant search engine in China, trades for 31 times sales and 56 times EBITDA. Do the companies deserve similar valuations? There is, of course, a big difference between China and Russia: 1.2 billion people. Since China is a much larger market, Baidu has much more growth ahead of it. Furthermore, China's GDP per capita is rapidly rising, while Russia's recently declined, suggesting that China will ultimately command far higher prices for advertising. And while I continue to think Baidu is richly valued, I could see relatively low-risk merit in being long Baidu and short Yandex at these prices.
Is there a better play?
That said, the best emerging-markets search stock may also be the most overlooked: Google. At four times sales and 11 times EBITDA, the company looks like a bargain relative to its industry peers, and its dominant U.S. business is generating more than enough cash to fund heavy investment in emerging markets, in addition to the company's mobile, video, payment, and other strategies. And while Google is No. 2 in Russia and a relative afterthought in China at present, it's No. 1 in the two other BRIC countries, Brazil and India.
With Brazil being larger and with less Internet adoption than Russia, and India home to 1.2 billion people and with far less Internet usage than China, it's arguably true that Google has a Baidu and a Yandex living inside of it. Perhaps the company needs to think seriously about spinning off its operations in those countries and listing them separately at this point. Given the current market climate, they would command multibillion-dollar valuations on their own. Now, it's hard to know exactly what those valuations would be, since Google does not break out results by country, but the valuations of Baidu and Yandex together represent half of Google's current market cap.
Furthermore, it's not game over for Google in China. Google has earned considerable brand cachet in China by opposing censorship of search results -- a prestige that ought to pay off as Internet censorship in China eases over time. This won't happen overnight, of course, but Google's business is strong enough to play a very long-term game.