Yandex (YNDX), one of Russia's largest tech companies, lost 40% of its market value over the past 12 months as it grappled with an antitrust probe, concerns about its net losses, rising interest rates, and the Ukrainian conflict sparking an exodus from Russian equities.
But after that steep sell-off, Yandex trades at just 2.2 times this year's sales. That seems like a very low valuation for one of Russia's largest online search, ride-hailing, e-commerce, and streaming media companies.
Did the market overreact to the near-term headwinds and create a good buying opportunity for investors who can ride out the current volatility? Let's review the bear and bull cases for Yandex to find out.
How rapidly is Yandex growing?
Yandex generated 46% of its revenue from its search and portal business in 2021. This core business houses its namesake search engine, which processes nearly 60% of Russia's online searches, as well as its associated network of portal websites.
It generated 37% of its revenue from Yandex Taxi, the ride-hailing, food delivery, and logistics business which it originally launched as a joint venture with Uber (UBER 0.65%). Yandex bought out Uber's stake last December.
The rest of Yandex's revenue comes from its e-commerce business Yandex Market, its streaming media platform Yandex Plus, and its artificial intelligence-powered content recommendation service Zen.
Yandex's revenue rose 54% to 356.2 billion rubles ($4.5 billion) in 2021, marking a significant acceleration from its 24% revenue growth in 2020. Its search and portal revenue grew 32%, its taxi revenue rose 94%, and Yandex Market's total gross merchandise volume (GMV) jumped a whopping 180%.
However, Yandex's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also declined 29% to 32.1 million rubles ($0.4 million) in 2021. It also posted a net loss of 14.7 million rubles ($0.2 million), compared to a net profit of 20.3 million rubles in 2020.
What the bears will say about Yandex
The bears will point out that Alphabet's (GOOG -1.28%) (GOOGL -1.21%) Google still ranks a close second to Yandex in Russia's online search market. In fact, some third-party websites, such as Statcounter, rank Google as the market leader.
This intense competition could limit Yandex's pricing power in online ads. As a result, the search and portal's adjusted EBITDA margin -- which already dipped 40 basis points to 48.2% in 2021 -- could keep slipping.
Yandex, like Google, has also faced allegations of prioritizing search results for its own first-party services over third-party competitors. Those criticisms sparked an antitrust probe which lasted for nearly a year and ended with a settlement in January -- in which Yandex pledged to audit its search results annually to ensure they were "unbiased."
However, that settlement could also prevent Yandex from leveraging the dominance of its core search engine to promote its adjacent platforms in the future. As part of that deal, Yandex will also donate 1.5 billion rubles ($18.9 million) -- 0.4% of its revenues last year -- to a non-profit fund to support the future development of the Russian tech industry.
Analysts expect Yandex to remain unprofitable in 2022 as it pays off that contribution, ramps up its investments, and fully takes over Uber's stake in its taxi business. All that red ink could make Yandex an unappealing investment as interest rates rise.
Another issue is the potential devaluation of the Russian ruble against the U.S. dollar if the Ukrainian crisis deepens. If that happens, as it did after Russia's annexation of Crimea sparked sanctions in 2014, it wouldn't make much sense for U.S. investors to hold Yandex or any other Russian stock.
What the bulls will say about Yandex
The bulls will point out that the analysts still expect Yandex's revenue to rise 39% in 2022 and grow another 33% in 2023. Those growth rates are really high for a stock that trades at a mere two times this year's sales, even if the near-term headwinds devalue the ruble against the U.S. dollar.
They'll also point out that the profitability of Yandex's taxi division is improving, even as it expands its low-margin ride-hailing, ride-sharing, food delivery, and logistics segments. As a percentage of its total GMV, the segment's adjusted EBITDA margin improved from 0.9% in 2020 to 1.7% in 2021, which suggests its long-term growth is sustainable.
The growth of Yandex Search and Yandex Taxi could then support the expansion of its e-commerce, streaming media, and Zen businesses, which would lock in more users and widen its moat against Google.
There's also a slim chance that Google could be forced to leave Russia if the relationship between Russia and the U.S. continues to deteriorate, just as it left mainland China over a decade ago. If that happens, Yandex could experience a massive growth spurt -- as Baidu did in China after Google's departure -- and easily take over the entire Russian market.
Should you buy Yandex today?
Yandex's stock looks undervalued right now, but it could remain out of favor for a very long time. Its valuations should limit its downside potential, but I'd rather stick with more promising growth stocks in this challenging market.