In this article, we examine Yandex stock (NASDAQ: YNDX), and its financial position and operating performance. Yandex N.V. is a multinational technology company specializing in Internet-related products and services. The company’s search engine is the 4th largest in the world (Google, Baidu, and Yahoo are ranked 1-3, respectively). In addition, Yandex is the most popular search engine in Russia with around 60% market share. At the time of this article, Yandex stock traded at $26.24.
Yandex’s Financial Performance
For a detailed summary of Q4 and 2016 figures, visit Yandex Investor Relations. Our following analysis is a high-level summary of the company’s 2016 income statement.
Most recently, Yandex released its 2016 annual report (Form 20-F) back in late May. The company reported руб 75.9 billion (Rubles) in revenues– up from руб 59.8 billion in 2015 revenues. The 2016 руб 75.9 billion revenues translate to $1.25 billion (USD). Nearly all of the company’s business is conducted in Russia. Therefore, the vast majority of the company’s revenues are in Rubles.
For 2016, operating expenses totaled руб 63 billion ($1 billion USD). On a year-over-year basis, this is a 25.5% increase from 2015 operating expenses. Specifically, the increase is attributable to all operating expenses (cost of revenues, product development, SG&A, etc). Like revenues, nearly all of the company’s personnel expenses are paid in Rubles.
Last, Yandex’s 2016 net income amounted to руб 6.8 billion ($111.8 USD). This resulted in diluted earnings per share, in US Dollars, of $.34. The company’s net income figures over the past 3 years (in Rubles) are руб 9.68 billion (2015), руб 17 billion (2014), and руб 13.47 billion (2013).
Yandex’s Exposure to Economic Downturns
In the second half of 2014, the Russian economy began deteriorating rapidly. As with all financial crises, the Ruble collapsed from investors selling Ruble-denominated assets due to a loss of confidence in the Russian economy. Primarily, the two causes of this sell-off were a large decline in the price of oil and economic sanctions. Interestingly, countries imposed these sanctions on Russia in response to the Crimea annexation and the Ukranian intervention.
Since the vast majority of Yandex’s business is conducted in Russia, Yandex stock is inevitably correlated to volatility in the Russian Ruble. There are two components to Yandex’s currency-rate risk:
1) If the Ruble depreciates against other global currencies, Yandex will have to spend more on operating expenses (personnel costs) to maintain its international competitiveness. Of course, these cost increases will not necessarily coincide with increased revenues, and so net income would decline.
2) Yandex holds a large portion of its cash & cash equivalents in USD and other short-term, dollar-denominated assets. Therefore, if the Ruble appreciates against other global currencies, Yandex will have to revalue its cash positions by recognizing a foreign exchange loss.
For long-term investors, the second scenario is more attractive. The company has a profitable, scalable business model. Recognizing a nonrecurring, foreign-exchange loss is not nearly as bad as losing profitability from increased personnel expenses (which would likely last longer).
For short-term investors and traders, the first scenario is more attractive because personnel expenses will take longer to show up in the financial statements, but the foreign-exchange gain for the company’s cash is immediate.
Yandex Stock Rating (YNDX)
Compared to most profitable technology companies, Yandex N.V. is a very volatile stock. With a beta of 2.75, many American investors would avoid this stock under all circumstances. However, we believe patient, long-term investors in Yandex will be rewarded well for owning this stock over the next several years.
Of course, we predicate this thesis on the Russian economy (and therefore the Ruble) maintaining its path to recovery. In addition, Yandex stock does not currently pay a dividend, and it has a high P/E ratio of 49.33. Nevertheless, the company’s Search Engine is one of the only growing search engines in the world. Furthermore, Yandex’s online-to-offline (O2O) initiatives are experiencing incredible growth. One initiative, Yandex. Taxi recorded 401% year-over-year growth. Therefore, we are adding Yandex stock (YNDX) to our Bullish List. To see which stocks we believe are strong sells, please visit our Bearish List.