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Should You Buy Yandex After Its Post-Earnings Dip?

By Leo Sun – Updated Apr 25, 2019 at 10:26AM

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Did investors in Russian tech giant overreact to the company's forecast for lower margins in 2019?

Shares of Yandex (YNDX -6.79%) took a tumble last week after the Russian tech giant posted its fourth-quarter earnings. In the report, Yandex's revenue rose 39% annually to 38.8 billion RUB ($589.8 million), while its adjusted net income climbed 32% to 6.9 billion RUB ($104.9 million). Its adjusted EBITDA rose 33% to 12.3 billion RUB ($187 million).

Those growth rates looked solid, but Yandex expects the margins of its Search and Portal business to contract 100 to 200 basis points in 2019. That downside guidance spooked investors, but the stock remains up more than 140% over the past three years. Should investors buy Yandex after its post-earnings dip?

A stock chart.

Image source: Getty Images.

How fast is Yandex growing?

Yandex's top-line growth has remained robust over the past year. Its net income was boosted by the deconsolidation of its e-commerce platform, Yandex.Market, into a joint venture with Sberbank (SBRCY) last April.

Metric

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Revenue

29%

34%

39%

39%

Adjusted Net income

7%

27%

157%

32%

Adjusted EBITDA

12%

23%

88%

33%

Year-over-year growth, including Yandex.Market. Source: Yandex quarterly earnings.

Yandex's revenue from online ads rose 18% annually during the fourth quarter and accounted for 76% of its top line. Meanwhile, its traffic acquisition costs (TAC) only used up 15.9% of its revenue, compared to 17.2% a year earlier.

Yandex is spending less money securing traffic because it comfortably leads Russia's search market with a 54% share, according to StatCounter. Alphabet's (GOOG -3.29%) (GOOGL -2.75%) Google ranks second with a 43% share. Yandex previously only topped Google on desktop PCs, but it extended that lead to Android devices last year.

Check out the latest Yandex earnings call transcript.

Diversifying away from online ads

Yandex's "Other" revenue, which accounted for the rest of its top line, surged 235% annually. It attributed that growth to higher revenue from its ride-hailing service Yandex.Taxi, along with the growth of its Yandex.Drive carsharing platform and hardware devices, which include its Yandex.Station smart speaker, Yandex.Ultra onboard computer for connected cars, and its "Google-free" Android phone. Those hardware devices are all integrated with its Alexa-like virtual assistant Alice.

A young woman uses a smartphone.

Image source: Getty Images.

Yandex is leveraging its lead in the online search and ad markets to expand its ecosystem with those new services and hardware devices. Other expansion efforts include its cloud and email services, online payments, streaming videos, a classifieds platform, a new e-commerce platform called Beru, and a news aggregator called Zen.

Yandex's ecosystem expansion didn't weigh down its adjusted EBITDA margin throughout most of 2018. That's why its forecast for a 100 to 200 basis point drop in fiscal 2019 alarmed some investors.

Metric

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Adjusted EBITDA margin*

29%

30.5%

32.9%

31.7%

Source: Yandex quarterly report. *Excluding Yandex.Market from Q2 onwards.

Yandex attributes that decline to higher sales of its lower-margin hardware devices. That isn't surprising, since Yandex will likely sell its Alice-connected devices at lower prices to tether more users to its data-gathering ecosystem.

Investors should note that only Yandex's core Search and Portal business posted positive adjusted EBITDA growth for the full year. All of its other reportable segments -- e-commerce, taxi, classifieds, media services, and "experiments" -- posted adjusted EBITDA losses. Like Google, Yandex plans to use its established Search and Portal businesses to support its lower-margin or loss-leading expansions into adjacent markets.

Should you buy Yandex?

Analysts expect Yandex's revenue and earnings to rise 31% and 40%, respectively, this year. Those are impressive growth rates for a stock that trades at just 16 times forward earnings. Its forecast for a margin decline isn't surprising, and it could strengthen its ecosystem over the long term and widen its moat against Google in Russia.

Yandex still faces unpredictable macro headwinds, including a weaker ruble and the possibility of sanctions against Russia, but it remains one of the few regional search engines to hold its own against Google. Yandex still has room to run, and growth-oriented investors might consider starting a position and take advantage of this recent stock price drop.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of SBERBANK OF RUSSIA S/ADR. The Motley Fool recommends Yandex. The Motley Fool has a disclosure policy.

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