|January 9, 2014, 10:29 A.M. ET|
Yandex: Morgan Stanley’s Top 2014 Media Pick, Raise TP To $50
By Shuli Ren
Russian search engine Yandex (YNDX) is a “‘must own’ GEM stock,” says Morgan Stanley, which raised their Buy target price from $42 to $50 today.
Morgan Stanley thinks the street is underestimating Yandex’s ability to monetize search, because search will have a disproportionately high market share in advertising in Russia due in part to a lack of alternatives. Here are analysts Edward Hill-Wood, Polina Ugryumova, and Cesar Tiron:
We believe search will generate a disproportionately high market share of advertising in Russia – we forecast 23% by 2016 (73% of digital budgets). We expect Yandex to exceed Google’s share of its domestic ad market in 2013 for the first time and ultimately exceed NHN in South Korea at 16% in 2016. This is due to (a) more limited alternative online advertising options in Russia and (b) YNDX should taker a higher share of direct eCommerce than Baidu in China due to the scale of the largest eCommerce players. Yandex also offers SMEs genuinely national marketing options that have not been replicated by local advertising networks. The Russia user base is also highly engaged. Our AlphaWise Survey indicates that almost 100% of Russian users regularly use search and over 60% are actively using two search engines (Yandex and Google).One concern with Yandex is that it may have become too expensive. Yandex’s share price has almost doubled in the last year. That is not out of the ordinary, says Morgan Stanley. Yandex currently trades at about 19x EV/2014 Ebitda. For comparison purposes:
We believe Yandex’s position and outlook places it in a selective group of EM stocks that appear disproportionally attractive for investors. The potential introduction of a dividend and local listing would further enhance this. A glance at global valuations will quickly highlight similar stocks that have sustained significant valuation premiums such as Amazon (18x 2015 EBITDA), Facebook (17x), Naver (19x), Tencent (19x), ASOS (40x), Rightmove (20x). Aside from growth, these stocks typically have business models that are deemed capable of sustaining well above average and predictable growth rates for a long period due to high entry barriers, pricing power, market position, growth run-ways etc.The key risk Yandex faces is Google (GOOG), which is why Morgan Stanley places a base case of $50 price target on Yandex. Its bull case, in which Google is not a competitive threat, is $70. Here is Morgan Stanley on Google:
Our proprietary AlphaWise survey further indicates that Google’s mid-term position is improving due to its distribution advantages in mobile, apps and video. It also highlights Google’s relative strength amongst younger 16-24 year old users.Shares in Yandex traded 3.5% higher this morning to $43.8.