Yandex Cheapest Ever Versus Google on Spending: Russia Overnight

Yandex NV plunged to the cheapest level on record versus Google Inc. on concern the Russian search engine is boosting spending to remain competitive with its rival as the outlook for web advertising deteriorates.

Shares of Yandex sank 10 percent yesterday to $23.01 in New York, the steepest one-day drop in almost 17 months. The company, which dominates more than 60 percent of Russian web searches, traded at 20 times estimated earnings, 14 percent above Google’s valuation and the smallest premium since Yandex started trading on the Nasdaq Stock Market in 2011. The Bloomberg Russia-US Equity Index rose 0.5 percent.

Yandex tumbled after reporting fourth-quarter net income that trailed analysts’ estimates and saying 2013 revenue growth may slow to as little as 28 percent, from 44 percent last year. The company, which rolled out a Turkish search site in 2011 and became the fourth-biggest engine by number of searches globally in November, said yesterday that costs swelled to 25 percent of revenue in 2012, from 23.5 percent in 2011.

“Expansion outside of Russia as well as maintaining the company’s current market share in the home market comes at a cost,” Anastasia Obukhova, an analyst at VTB Capital, the investment banking unit of Russia’s second-largest bank, said by phone from Moscow yesterday. “The cost seems to be unjustified and is just too high.”

Obukhova has a sell recommendation on Yandex shares, and a target price of $21 per share, representing an 8.7 percent drop from yesterday’s closing price. Yandex’s trading volume was almost seven times the daily average over the past three months yesterday, data compiled by Bloomberg show. The benchmark Micex Index slid 0.5 percent to 1,514.75 by 5:35 p.m. in Moscow today.

ETF Rallies

Futures on Moscow’s RTS stock index fell 0.3 percent in Moscow today to 158,390. The Market Vectors Russia ETF, the largest Russian exchange-traded fund, rose 0.9 percent to $30.26 in New York yesterday, while the Bloomberg Russia-US gauge climbed to 103.40. The RTS Volatility Index, which measures expected swings in futures, slipped 0.6 percent to 20.15 points today.

Net income for Yandex was 2.69 billion rubles ($89 million) in the three months through December, compared with 2.12 billion rubles in the same period a year earlier, the Hague, Netherlands-based company said yesterday. That missed the 2.96 billion-ruble average of three analysts’ estimates compiled by Bloomberg.

Yandex forecast that revenue growth may slow to between 28 percent to 32 percent this year, compared with the 32 percent increase estimated by analysts. The company got 90 percent of third-quarter revenue from text-based advertising.

‘Flat’ Margins

“The market has matured and it’s impossible to grow at 60 or 44 percent a year anymore,” Chief Financial Officer Alexander Shulgin told reporters in Moscow yesterday. “We estimate 2013 margins to be flat compared to 2012.”

The below-estimate guidance suggests that growth in Russian Internet advertising is “slowing fairly sharply,” David Ferguson, a media analyst at Renaissance Capital that rates Yandex hold, wrote in a client note yesterday.

Web advertising in Russia rose 35 percent last year to $1.87 billion, the Association of Communication Agencies of Russia, or AKAR, said Feb. 6. Russia’s economy grew 2.2 percent in the three months to the end of 2012, Deputy Economy Minister Andrei Klepach said Jan. 29. That would be the slowest pace since the economy contracted in 2009.

Yandex had 61.9 percent of Russian searches in the week to Feb. 18, compared with 26.1 percent for Mountain View, California-based Google, according to data. Yandex overtook Microsoft Corp.’s Bing on global web searches in November to become the world’s fourth-biggest engine by number of searches, ComScore Inc. data issued Feb. 7 showed.

Turkish Focus

In Turkey, where its site offers local maps, free e-mail, and translation as well as search, Yandex is seeking to boost its share of the market to as much as 8 percent by the end of this year, from 1 percent last year, Alexander Vengranovich, an analyst at Otkritie Financial Corp. in Moscow who rates the stock buy, said by phone yesterday.

Google has about 60 percent of the Turkish search market, Mehmet Ali Yalcindag, the chairman of Yandex Turkey, said in September.

Yandex’s focus in Turkey this year “will be market share, not so much revenues,” Chief Executive Officer Arkady Volozh said yesterday, according to the transcript of a conference call with investors and analysts. “We need to reach some critical mass to start selling the search advertising there.”

The spending in Turkey will pay off over time, according to Otkritie’s Vengranovich.

‘Right Thing’

“The Russian market is slowing and Yandex is looking for new areas for growth, which is the right thing to do,” he said by phone yesterday. “It comes at a cost, which doesn’t have to blur a longer-term vision.”

Piper Jaffray Cos. reiterated its rating equivalent to buy on Yandex stock yesterday, saying it is still the “best play on the Russian Internet market,” according to an e-mailed report from analysts including Gene Munster in Minneapolis. The Russian company may be a better investment when it comes to international web search than Beijing-based Baidu Inc., China’s most-used search engine, the Piper Jaffray analysts said.

Tiger Global Management LLC cut its stake in Yandex to 8.14 percent by the end of last year, from 37.4 percent a year earlier, according to the New York-based fund’s Feb. 14 regulatory filing.

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