Refocusing on Yandex's Latest Quarter

It seems an understatement to say that it's been an eventful past several weeks for Yandex (YNDX) investors. A little over a month ago, shares of the Russian Internet search leader plunged nearly 18% in a single day following reports that Russian government officials were weighing legislation to limit foreign ownership in domestic tech companies to 20%. The following week, Yandex stock soared more than 10% on news that the same authorities had eased the proposed cap to just under 50% -- an obvious effort to prevent foreign stakeholders from amassing a controlling stake in the company.

Image source: Getty Images.

Don't lose sight of the bigger picture

Of course, investors are right to pay close attention to how this situation plays out. But lost in the noise was Yandex's reasonably strong third-quarter 2019 release on Oct. 25, the first trading after which shares modestly declined when management offered little insight on the foreign ownership issue.

Earlier this week, however, shares continued to rally after Yandex offered its own solution to the potentially restrictive law, proposing a restructuring that would form a "Public Interest Foundation" capable of (among other powers) rebuking foreign investors' attempts to take an outsized interest in the business. Russian authorities are reportedly supportive of Yandex's move, indicating they'll withdraw their own initiatives to allow for revisions, accordingly.

So while the dust still hasn't quite settled to that end, I think now is as good a time as any for investors -- whether foreign or domestic -- to zoom back out on the bigger picture by digging into Yandex's Q3 results. After all, before debating how much of Yandex foreign investors can own, exploring its recent performance can help determine whether the stock is worthy of a spot in your portfolio in the first place.

Let's start with a closer look at how Yandex's revenue and earnings fared relative to the same year-ago period:

DATA SOURCE: YANDEX.

Digging deeper

Investors should keep in mind that these results include the impact of items like foreign-exchange headwinds and stock-based compensation. Adjusted for those items, Yandex's net income climbed 12% year over year to 6.876 billion rubles, or roughly $0.32 per share. By comparison -- and though we don't typically pay close attention to Wall Street's near-term demands -- most analysts were modeling higher adjusted earnings of roughly $0.35 per share but on lower revenue of $671 million.

Meanwhile, revenue excluding traffic acquisition costs (ex-TAC) -- which the company likens to sales commissions -- grew an even more impressive 44% year over year to 39.257 billion rubles.

Breaking it down further, the bulk of Yandex's top line came from its core online advertising business, where revenue climbed 21% to 31.232 billion rubles. Paid clicks on both Yandex's and partners' websites grew 22% year over year, while Yandex's average cost per click (a measure of how much it makes per ad) fell a reasonable 2%. Internet search queries in Russia also jumped 9%, and Yandex's share of that market expanded 70 basis points year over year to 56.6%.

But Yandex's supplementary businesses are also gaining ground quickly: Taxi segment revenue soared 89% to 9.636 billion rubles (or 21% of total revenue, spurred by a 58% increase in the number of taxi rides and optimization of incentives); and "other" segment revenue nearly tripled (up 169%) to 4.146 billion rubles (or 9% of total sales), led by growth from the Yandex.Drive car-sharing service, media services subscriptions, and Internet of Things initiatives.

Looking ahead

Yandex CEO Arkady Volozh said he was "delighted" with the company's "excellent set of results," adding:

In Q3, our ride-sharing business delivered sequential acceleration in ride growth, while [the Zen personal recommendations service] continued to grow its user engagement, and Yandex.Drive became the second largest car-sharing service in the world. Our strong IT expertise allows us to develop new business models, and we aim to continue preserving and growing the IT talent pool both for Yandex and the country as a whole.

As such, Yandex once again increased its full-year 2019 outlook to call for ruble-based revenue (excluding Yandex.Market, which was deconsolidated to a joint venture with Sberbank early last year) to increase 36% to 38% from 2018, up from its old target for 32% to 36% growth. This assumes growth of 20% to 21% from the search and portal business, up from 19% to 21% before.

Coupled with the added clarity Yandex has since provided on the foreign ownership issue, this strong report contained little not to like from a long-term investor's perspective. And while the stock has since popped as the market absorbed the news, I think Yandex will likely prove to be a top stock for patient investors going forward.