The Baidu of Russia
In China, Baidu (NAS: BIDU) has the dominant share of search requests, accounting for 80.3% of total searches and 75.9% of search revenue in the country. That's far greater than Google's (NAS: GOOG) 18.9%. As a result, in the past four years, Baidu's revenues have increased more than tenfold, and its stock has generated returns in excess of 1,000%.
However, Baidu is not the only one that has a dominant home-country market share over Google. Recently IPO'd Yandex (NAS: YNDX) also exhibits this characteristic, with a 65% market share in Russia, while Google has only 22%. In addition, though Baidu and Yandex are not direct competitors, an investor can draw three parallels between the two companies that explain why I think Yandex is poised for long-term success.
The links between Baidu and Yandex
1. They both have a unique competitive advantage over Google.
Baidu is a homegrown company in China, where there is a high sense of national pride for domestic businesses. As a result, the government will do everything it can to promote them over foreign competitors. For instance, Google has had many run-ins with the Chinese government over censorship and blocking of its services, and in the past year alone Google has seen its market share in China plummet from nearly 36% in early 2010 to its current 19%.
Yandex, on the other hand, has a better search engine in Russia than Google has, as its complicated algorithms are able to account for the complexities of the Russian language. There is a vast amount of different possible conjugations for a Russian word, and Yandex has prospered by being able to incorporate those conjugations into meaningful searches, while Google has been struggling with this for quite some time. The popular search browser Firefox in January 2009 was able to realize this and dropped Google as its default search engine in lieu of Yandex in Russia.
2. Both companies have exhibited explosive growth rates.
Baidu has seen its revenue increase by more than 30 times in the five years leading up to the end of 2010, and Yandex has doubled its revenue on a yearly basis many times since 2000. Both companies also have been able to not only increase the amount of users searching through them, but have also seen explosive growth in the number of advertisers that contribute additional revenues.
Here is the current snapshot of their advertisers.
Source: Company filings.
In Europe, Russia is the fastest-growing Internet population, with an audience growing at 25% to 30% a year. This makes Russia the second-largest European market, and it's predicted to outgrow No. 1 Germany in the future.
3. Both Baidu and Yandex operate in markets that are relatively untapped.
People Using Internet
% Tapped Market
Sources: Company filings, CIA Factbook, CIO Magazine, and author's calculations. Numbers in millions.
Even though these companies are growing at a fast rate, there is still much more room to expand. In China and Russia there are 851 million and 90 million people, respectively, who still do not access the Internet.
At this point, you are probably thinking that China is a much better play, as there are nearly 10 times as many potential users to be gained. However, the revenue per person in Russia is nearly 4 times higher than it is in China, and coupled with the fact that in Russia only 4% of the population has mobile Internet -- leaving plenty of room for growth -- it doesn't look so bad that Russia has a much smaller potential user base.
Foolish bottom line
Taking all this information together, I don't think Yandex can grow as fast as Baidu, as the Russian marketplace has less potential than China, but I do believe that Yandex is still poised for long-term growth. With its lofty P/E in the 60s, I can see why investors may be scared away from diving into this stock, but with plenty of growth ahead and a leg up on Google, it's more than reasonable to think that the company can grow into its valuation.
At the time this article was published Fool contributorIgor Meyersonowns no shares of the companies listed. The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Baidu and Google. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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