Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Let Yandex (YNDX -6.79%) shareholders rejoice! Their long, dark winter of falling share prices (actually, I think it's still autumn) appears to be at an end.
For more than a month now, Yandex stock has been battered by rumors that Russian state-controlled Sberbank was planning to acquire a 30% interest in Yandex -- part of a plan that one Russian bank analyst called a "creeping takeover" of Yandex by the Russian state. Yandex fell 28% in the days following this news -- a decline only halted when its CEO came out with a declaration that he had "no intention" of selling shares to Sberbank, and later, when the company confirmed it is reviewing "potential hostile takeover defenses" to prevent a Sberbank takeover from happening.
Investors think this is great news. From low point to high point, Yandex stock has already recovered nearly 10 of the percentage points it lost in the wake of the first Sberbank rumors -- and today, it's rising again, this time in response to a new buy rating from Jefferies & Co.
Here's what you need to know.
This morning, analysts at Jefferies announced they are initiating coverage of Yandex with a buy rating and a $38 price target that -- if reached -- would take Yandex all the way back to its pre-Sberbank-rumor share price, and even a bit higher. With so much potential profit to be won (about 31% from today's prices), Jefferies says Yandex is actually its "preferred name" in the internet space, according to a write-up on StreetInsider.com (subscription required).
Should it be?
Better than Google (in Russia)
Jefferies argues that Yandex stock offers investors "an attractive blend of sector-leading growth, reasonable valuation and clear catalysts," and it's easy to see why.
"[A]s opposed to Google," says the analyst, Yandex is "the ultimate leader in online Russian search due to its local focus [and] superior understanding of user intent in the Cyrillic alphabet," as well as the fact that Yandex has indexed "10x larger Russian websites" than can be found using Google's search engine. In addition, the analyst reasons that companies optimizing their websites for search tend to do so with the aim of getting their websites to show up on whichever search engine is most popular.
In practice, this means that in Russia, Yandex (56% market share) finds more websites than Google (40% market share). Unless and until Google overtakes Yandex in market share, therefore, Jefferies reasons that Yandex will have "lasting competitive advantages" over its American rival.
The best time to buy
But if Yandex's advantages are so "lasting," why does Jefferies think that now is the right time to buy Yandex?
In Jefferies' view, the answer is the IPO calendar. In 2019, the analyst believes Yandex is likely to IPO its money-losing ride-share business, Yandex.Taxi (which absorbed Uber's business in Russia, and is now the country's leading online taxi service as a result). Assuming that happens, such an IPO would unlock value for Yandex -- potentially offsetting the near-term negatives of owning this money-losing business -- and so Jefferies wants to recommend Yandex before it gets a bump from a Yandex.Taxi IPO.
What investors really need to know
Of course, it's important to point out that there may be more negatives to Yandex stock than initially meet the eye. Although significantly cheaper than it was just one month ago, and trading for just 13 times GAAP earnings, Yandex's earnings were inflated earlier this year after it "deconsolidated" its Yandex.Market business (ironically, by contributing it to a joint venture with Sberbank). As a result, when you value Yandex on its free cash flow ($155 million) rather than its GAAP net income ($688 million), the stock trades for 58 times FCF, which is much more expensive than its P/E ratio of 13 would suggest.
Now granted, with a projected earnings growth rate of nearly 42% annualized over the next five years, it's arguable that Yandex is worth 58 times FCF -- and Jefferies certainly seems to think that it is. Moreover, a Yandex.Taxi IPO could potentially reduce the financial impact of its losses on its parent company, thus improving Yandex's own free cash flow number -- which would be another positive to look forward to.
All that being said, unless and until I see Yandex's free cash flow improve in fact, I'll be sitting this one out -- Jefferies' recommendation notwithstanding.