Should You Buy Yandex After Its Post-Earnings Dip?

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

Shares of Yandex (YNDX) 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?

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 0.17%) (GOOGL 0.06%) 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.

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.