Can Yandex Weather a Second Wave of COVID-19 Infections in Russia?

Yandex‘s (NASDAQ:YNDX) stock recently dipped after the Russian tech company posted mixed third-quarter numbers and warned of rising COVID-19 cases across the country.

Its revenue rose 30% year-over-year to 58.3 billion rubles ($732.1 million), which missed expectations by $21.8 million. On a like-for-like basis, which excludes its consolidation of Yandex.Market from both periods, its revenue rose 19% to 53.7 billion rubles ($674 million). On the bottom line, Yandex’s adjusted net income rose 11% to 7.6 billion rubles ($96 million), and its adjusted EBITDA increased 8% to 15.1 billion rubles ($189.4 million). Its GAAP earnings, which were boosted by the Yandex.Market consolidation, more than quadrupled to $0.77 per share and beat estimates by $0.65.

The business district in Moscow.

Image source: Getty Images.

Yandex’s third-quarter growth looked stable, but it didn’t provide any forward guidance in light of the pandemic. It also warned the “number of new COVID-19 cases in Russia started to grow again in September and in October already surpassed the May peak.”

It noted those infections already caused a “slowdown” in its advertising and mobility (ride-hailing and car-sharing) businesses in early October, and its near-term growth will “highly depend” on Russia’s ability to contain the pandemic. Does that dire warning make Yandex too risky to own right now?

The advertising business faces a tough balancing act

During the third quarter, Yandex generated 57% of its revenue from its core advertising business, which comes from its search engine, portals, and ad network. The segment’s revenue grew 6% year-over-year, as the 12% growth in its Yandex properties was partly offset by an 18% decline in its advertising network revenue. Excluding Yandex.Market, the unit’s revenue rose just 2%.

It attributed that slowdown to pandemic-related headwinds across the travel, auto, and real estate sectors, as well as resilient industries (like food deliveries) that don’t need to buy more ads during the crisis. It also ended its search contract with Mail.Ru, which reduced its total advertising growth by two percentage points.

Those headwinds partly offset Yandex’s stronger ad sales in the fast-moving consumer goods, IT, telecom, finance, insurance, and healthcare industries. However, it warned that the pace of that recovery was decelerating again due to the recent surge in new COVID-19 cases.

On the bright side, Yandex’s share of the Russian search market rose 270 basis points year-over-year to 59.3%, according to Yandex.Radar, putting it ahead of Alphabet‘s Google. Its share of the Android search market also grew from 52.8% to 58.7%.

Yandex’s paid clicks rose 14% year-over-year, but that growth was likely driven by a 12% decline in its cost per click (excluding Yandex.Market) instead of higher market demand.

The mobility business could hit painful speed bumps

Yandex has been relying more heavily on the growth of its Taxi segment, which operates as a joint venture with Uber (NYSE:UBER), to offset the slower growth of its advertising business in recent quarters.

Yandex's self-driving car.

Image source: Yandex.

Yandex.Taxi’s revenue rose 55% year-over-year during the third quarter and accounted for 31% of the company’s top line. The business includes its eponymous ride-hailing business, the Yandex.Drive car-sharing business, and its food and grocery delivery services. It recently spun off the segment’s self-driving unit as a separate company.

That spin off, along with tighter cost controls and the increased scale of its ride-hailing network, boosted the segment’s adjusted EBITDA nearly 14 times year-over-year to 1.74 billion rubles ($22 million) — or 12% of its total adjusted EBITDA.

By comparison, Uber’s adjusted EBITDA at its mobility segment plunged 90% year-over-year to $50 million in the third quarter.

Yandex needs the Taxi business to keep growing until its advertising business recovers, but a second wave of infections could slam its ride-hailing and car-sharing segments as people stay at home. Its food and grocery delivery segments should continue growing throughout the crisis, but the growth of those smaller segments probably won’t offset its other losses.

Pouring more money into its unprofitable businesses

Lastly, Yandex will likely keep pouring cash into its “other” segment, which houses ecosystem-expanding businesses like its streaming media, online classifieds, e-commerce, online education, and cloud services.

However, this segment remains broadly unprofitable, with only the classifieds section posting a positive adjusted EBITDA. Nonetheless, investors should expect Yandex to keep subsidizing the growth of its “other” segment with the profits from its advertising and Taxi businesses. Therefore, if the pandemic hits Yandex’s advertising and Taxi businesses and it doesn’t cool off its ecosystem investments, its total profits could plummet.

The key takeaways

Yandex’s stock isn’t cheap at over 60 times earnings. Analysts expect its revenue to rise 25% this year and for its earnings to dip 3%, but the company’s recent warning suggests those forecasts are too optimistic. I’d be interested in buying Yandex at a lower valuation, but it doesn’t make much sense to buy the Russian tech giant right now when Alphabet offers a better diversified business at a much lower multiple.

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