Can Russian Search Giant Yandex Find Profits to Justify Its Hot IPO?

Can Russian Search Giant Yandex Find Profits to Justify Its Hot IPO?
Can Russian Search Giant Yandex Find Profits to Justify Its Hot IPO?

Russian search engine Yandex (YNDX) saw its IPO soar more than 55% on its first day of trading Tuesday, putting it among the top four opening-day gainers this year. But while this Russian beauty managed to attract the attention of investors with its ability to maintain market dominance over Google (GOOG) in its native land, analysts are cautioning investors to temper their enthusiasm.

Yandex, which priced its IPO at $25 a share and raised $1.3 billion in capital, commands 65% of the search market share in Russia -- three times more than Google, notes Rick Summer, an analyst with Morningstar. And in the global search arena, Yandex holds its own, ranking sixth worldwide, according to comScore.

But although the Russian search market is expected to expand by 15% to 25% over the next five years as advertising migrates online from print publications, Yandex faces weakness in display advertising -- a segment of the online advertising market that Summer believes will become even more competitive going forward.

"While Yandex has been able to dominate text-based search [advertising] with approximately 80% market share, we believe that display advertising will become increasingly important to advertisers. We are concerned the company will not keep pace with the competition in that segment of the market," says Summer, in a research note. "Ultimately, Yandex will have to be successful in much more than paid search for the IPO to represent an attractive buying opportunity."

And when comparing it with Google, Summer added that Yandex's growth in its local market is expected to be substantially smaller than the U.S.-based search giant experienced after its IPO. Google's revenues grew 45% annually over the five-year stretch going into 2009.

The Pros and Cons of Dominating Russia

Summer further noted that investors should be wary if Yandex looks outside the borders of the former Soviet Union for growth. Analysts have noted that Yandex has been able to maintain its lead over Google in its local markets because its search algorithms are finely tuned to the Russian language, which gives it more accurate, useful results. Expanding its business outside of the Russian-speaking zone would negate that advantage.

Others analysts, noting how the Russian government often treats high-profile companies, are concerned that problems may flare up between Yandex and Moscow. Stephanie Chang, an analyst with IPO research firm Renaissance Capital, noted some investors may be concerned that the Russian government might demand that Yandex disclose some of its customers' information, as it reportedly has done with its PayPal-like online payments site, Yandex Money.

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Despite these concerns, Chang was pleased with the strength of the company's IPO, and says it's trading in the range she expected for it. Yandex priced its IPO at $25 a share, after raising its pricing range to $24 to $25 a share from $20 to $22 a share. It closed its first trading day at $38.84 a share.

"I'm not surprised to see it performed well, since it is the dominant search player in Russia," she said.

Chang resists the urge to compare Yandex's launch with LinkedIn's hot IPO. The business-focused social networking firm saw its share price surge by more than 100% from its target of $45 a share to close at $94.25 after its first trading day. But while they're both online players, LinkedIn (LNKD) operates in different countries, and with a much different business model.

And when comparing Yandex's IPO against those of other search titans like Google, which priced its IPO at $85 a share in a Dutch auction in 2004 and closed up 18% on its first trading day, or Chinese search giant Baidu (BIDU) which priced at $27 a share in 2005 and soared a whopping 354% on its first trading day, Chang says the comparison is difficult to make because the market conditions are much different now than they were back then.

"It's a completely different market now," says Chang.

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