Yandex became the No. 1 search engine in Russia more than 20 years ago, and since then it has successfully expanded into ride-hailing, e-commerce, fintech, and autonomous driving. Yandex’s total addressable market has grown from $0.9 billion in 2010 to $60 billion in 2020,1 and significant growth potential presents a catalyst for the stock price for many years to come.
The Fundamental Growth and Core Equity (FGC) team’s research process, which helps to identify investment opportunities, focuses on five key attributes of a company that are likely to lead to sustainable growth (see Figure 1). These attributes are qualitative and forward-looking; our assessment is based on the expertise and judgment of our analysts and is therefore unique to the FGC team. Viewed through this lens, the Russian internet search engine and digital platform Yandex is a company to watch.
Figure 1 : Fundamental Growth and Core Equity's Framework for Assessing Company Quality
Solid Market Share Growth
The website Yandex.ru was launched in 1997, and by 2001 it was the leading search engine in Russia, overtaking Rambler.2 By 2012, Google, the world’s leading global technology platform, began to threaten Yandex’s market share. But Yandex has managed to maintain and grow a sizable lead over Google in Russia, including overtaking Google as Russia’s leader in mobile device search, with 59.3 percent search share across all platforms.3 Yandex’s lead is owed partly to legislation that continues to favor Yandex in Russia. A law requiring that the Yandex search app be pre-installed on all devices starting April 1, 2021, should provide additional tailwinds for growth in market share.
Furthermore, Yandex’s strong suite of products has aided market share. In addition to search and portal, Yandex is now either the leader or a leading player in e-grocery, food delivery, car sharing, and auto classifieds. Many of these businesses are strong cash generators or have a clear path to profitability. Heavy investments in e-commerce and food tech are weighing on profitability, but these investments have driven strong operating results, and over the long term this spending is expected to lead to significant value creation. Management has a long track record of creating value and over-delivering on operating and financial results. The management team has been in place for many years, is highly respected, and communicates well with investors.
E-commerce in Russia is in its early stages, and many players are bidding for top positions. E-commerce is the area of greatest focus for Yandex. Gross merchandise value (GMV) is expected to grow more than 200 percent this year, after posting more than 175 percent growth in the first half of this year. Yandex expanded its warehouse capacity by more than four times in 2021 and has expanded its assortment to 20.9 million SKUs from just 3.8 million in March. Yadex’s e-commerce platform, Yandex.Market, has solid positions in fast-moving consumer goods and consumer electronics, accounting for 38 percent and 33 percent of GMV, respectively. Yandex has its own logistics services that provide delivery of approximately 150,000 SKUs to customers within one to two hours. Currently, 89 percent of orders are handled by Yandex’s own delivery services, versus 16 percent last year. Yandex is positioning to be a top-three player in e-commerce in Russia over the next decade.4
Yandex’s ride-hailing business continues to grow strongly and maintain a leadership position in the market. Yandex is in the process of buying out Uber’s stake in the ride-hailing business, with Yandex keeping exclusive rights to use the Uber brand until August 2030. The Yandex.Go app and Uber Russia apps have a combined share of 41 percent in mobile app downloads year-to-date, far ahead of the second largest — CitiMobil — which had 16 percent over the same time period.5 Further regulation is being discussed by the Russian government for the ride-hailing industry, but all proposals are favorable to domestic players and most measures are already embedded in Yandex’s business projections.
Music/video subscription services
Marketing expenses tend to be a large part of the budget of tech companies. However, Yandex.Plus, a music and video subscription service with more than 10.5 million subscribers, helps Yandex reduce marketing expenses and generate higher customer retention. In addition to music and streaming video, Yandex.Plus also provides free delivery on Yandex.Market, cash back on various services (taxi, food delivery, e-commerce), and other benefits. KinoPoisk, Yandex’s online entertainment database, was Russia’s fastest-growing online movie streaming service in H1 2021. It is the leading player in the Russian online movie streaming market by number of total subscribers and paying subscribers, and the company continues to widen that gap. In July 2021, Yandex.Plus subscribers accounted for roughly 50 percent of the GMV at Yandex.Market, Lavka (Yandex’s online grocery delivery business), and Yandex.Eats (Yandex’s food ordering/delivery service), while 70 percent of Lavka users and 40 percent of Yandex.Eats users were Yandex.Plus subscribers. Furthermore, Yandex.Plus customers generate on average more than 40 percent higher GMV and 50 percent higher frequency of transactions than non-Plus customers.
One of Yandex’s more interesting and underappreciated verticals is the self-driving group. This includes not only autonomous taxis, which are expected to launch later this year, but also Yandex. Rovers, the company’s robot courier business. Earlier this year, Yandex announced a multiyear partnership with American online food delivery platform Grubhub to use robots to make deliveries on more than 250 college campuses in the US this fall. In October, Yandex introduced a pilot program that allows people to select robot parcel delivery from 27 post offices around Moscow, and the company plans to expand this effort. Yandex.Rover continues to look for other opportunities in Russia and abroad.
The autonomous taxi business has great potential, although delivery robot Yandex.Rover is closer to monetization (possibly in the next couple of years). Russia’s Ministry of Economic Development, together with Yandex, has recently developed a program to launch commercial autonomous taxis in Russia under an experimental regulatory regime later this year. Yandex will be able to launch autonomous taxis without a driver inside a car in Innopolis and Skolkovo, while rides in Moscow will be assisted by an engineer inside a car.
Although Yandex is an innovative company with a long potential runway to growth, the story is not without its risks. Regulation is a key topic when analyzing internet companies, and it has been evolving in Russia; however, it has been broadly in favor of Yandex. Russia tends to protect their local industry from global competition and that has been the case with internet and taxi industry regulation.
Furthermore, competition is a threat to Yandex in most areas of their business, but they take this threat seriously and have been successful in thwarting global competitors from taking market share. This has been seen clearly in the search and portal and taxi businesses, but it remains to be seen in e-commerce where competition is accelerating. Finally, Yandex is being valued more expensively than it has in recent history. That said, it is still priced very attractively compared to global peers.
Over the past few years, Yandex has managed to successfully transform its business from mostly search-based into a multi-vertical ecosystem that continues to expand. With its focus on e-commerce, Yandex is facing tough competition, but is taking the right steps to get ahead including increasing assortment and warehouse space and continuing to find efficiencies in logistics. With a solid base in search and portal generating significant advertising revenue, and a robust customer base, Yandex is in a prime position to build out its e-commerce, ride-hailing, subscription, and self-driving verticals. Management has proved its strong leadership skills in executing the company’s operational goals and dealing with strong competitive forces, and the future looks promising for this firm in our view.
1 Company investor presentations. 2 "Not Google One: A Survey of World and National Internet Search Engines". www.rspectr.com (in Russian). 2015-03-04. Retrieved 2020-01-14. 3 Company presentations, Yandex Radar. 4 Source for e-commerce data: Yandex investor presentation on company website. 5 UBS Evidence Lab and Sensor Tower (>Access Dataset), UBS Note: 2021 YTD data is current through 2 August, 2021.
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