FOCUS: Both mainly earning on ads, Yandex still better equipped for future than Mail.Ru

By Yekaterina Yezhova

MOSCOW, Aug 6 (PRIME) -- Heavily dependent on cash from advertising, Russia’s major Internet companies Yandex and Mail.Ru Group invest in diversification to improve July–December financials with analysts preferring first half-year figures of more aggressive Yandex, whose stocks they expect to rise in the next three years.

“We find Yandex’s figures for January–June solid. Advertising remains the main source of profit for the company. Yandex’s other businesses, including food delivery and taxi, have not hit the break-even point yet. They will only turn profitable later and still need injections for a while,” investment company Alpari senior analyst Roman Tkachuk told PRIME.

The Internet company created the Yandex.Market-based joint venture with Sberbank, the country’s biggest bank, in late April and deconsolidated the asset from its financial results.

Revenue from online advertising accounted for 84.1% of Yandex’s January–June revenue, or 47.322 billion rubles out of 56.245 billion rubles, including the Yandex.Market results through April 27. Online advertising revenue rose by 17% on the year in January–June, while total revenue spiked 32% thanks to cash flow from Yandex.Taxi, an online taxi hailing service, whose revenue soared to 7.180 billion rubles from 1.550 billion rubles a year earlier.

Monetization of Yandex.Taxi tripled on the year, but the service has not started paying back and lost 1.9 billion rubles in April–June, Tkachuk said.

Yandex also launched a U.S. $100 million share repurchase program for a year and smart speaker Yandex.Station, the company’s first hardware device, which enjoyed immediate success.

The company expects its revenue, excluding Yandex.Market, to grow 30–35% in 2018 and Search and Portal revenue to rise 20–22%.

Investment company Veles Capital analyst Artyom Mikhailin said, “Yandex posted strong results that exceeded our and market expectations. Additional support was secured from the FIFA World Cup (held on June 14–July 15), whose impact will show in the company’s results for July–September…We keep a positive view about the company’s future results.”

Mail.Ru Group reported first half revenue that was above expectations, but EBITDA below consensus. “We’re worried by the company’s falling margin. The upside is (social network) VK’s higher revenue,” Tkachuk at Alpari said.

Online advertising contributed 41.3% to the company’s total aggregate segment revenue. Advertising revenue jumped 38.9% on the year to 13.860 billion rubles, and total group aggregate segment revenue rose 29% to 33.577 billion rubles.

Mail.Ru Group’s recent developments were mainly extra options of its social network VK, like pay service VK Pay and AI-based content protection algorithm Nemesis. Mail.Ru Group also injected money into big local taxi aggregators Citymobil and Vezyot. “These investments allow us to deliver taxi functionality to our user base without being exposed to the ongoing subsidies and hence margin pressure,” Dmitry Grishin, chairman of Mail.Ru Group’s board, and Boris Dobrodeyev, CEO (Russia) said in a statement.

“January–June has seen continued very strong revenue growth with both the core, and the new businesses all contributing. We expect that advertising and games revenues will continue to show good growth in July–December. We also continue to see significant growth and opportunities for further integration from our eCommerce businesses. (E-sports firm) ESforce will be further integrated in July–December and as a result we are pleased to be able to increase our revenue 2018 guidance from the previous guidance of 23–28% to 26-30% growth or 71.7–73.9 billion rubles.”

Mail.Ru Group also expects its margin to improve in July–December, and the previous 2018 EBITDA guidance of 21–22 billion rubles was confirmed.

Quotes in question

Yandex has performed much more confidently than Mail.Ru Group: common shares gained 18.1% since the beginning of the year to 2,237 rubles on August 2 in Moscow and its American depositary receipts rose 10.4% in New York to $35.95. Mail.Ru Group’s global depositary receipts sagged 8.7% in London to $26.20.

Alpari views Yandex shares more interesting in the long-term than Mail.Ru Group stock. “We see a bigger growth potential at Yandex, because the company continues growing actively and investing heavily in both new projects and M&A deals. We like the company’s aggressive development strategy and recommend its shares for long-term investment,” Alpari’s analyst Tkachuk said.

“We’re waiting for Yandex’s strong financial results for 2018, the fact that is proven by a steady rise of advertising budgets in the (Russian-speaking Internet) Runet and a growing GDP of the country. Although Yandex’s shares could show no such growth in the coming six months, we think they will increase in the next one–three years.

“Many investors have Yandex’s shares on the short-list for purchase after completion of the active investing phase, when the company starts paying dividends. The thing is that this phase is tightly linked to high risks, while investors are known for loving dividends, not risks.”

Group of companies Finam analyst Leonid Delitsyn targets Yandex stock at 2,046 rubles per share and thinks quotes will be within a 2,000–2,500 ruble range during a year. “In order to exceed the 2,500 ruble notch, the market needs euphoria about high-tech on the whole with a corresponding growth of shares of Apple, Google, Facebook, Amazon, and others,” he told PRIME.

“Yandex’s strategic weakness still lies in its reliance on the online search advertising market since, even in view of higher revenue from Yandex.Taxi, search advertising brings over 80% of all incomes.”

(63.4549 rubles – U.S. $1)

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