NEBIUS GROUP N.V.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Yandex N.V., operating as “Yandex,” is a Dutch company that operates a prominent internet ecosystem predominantly in Russia, offering search, e-commerce, mobility, and entertainment services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Yandex’s business is complex, and it’s imperative to note that their operations have been materially affected by Russia-Ukraine war, recent sanctions, and general economic instability. This adds a layer of uncertainty to the investment thesis.

Business Overview

Yandex operates a broad portfolio of businesses centered around digital services in Russia, though it is important to note some services are now being operated under separate companies not owned by Yandex anymore due to the sale of its Russian operations. Key areas include:

  • Search and Portal: Yandex Search, the most widely used search engine in Russia, offers web search, maps, news, and various information services. This is a mature market in Russia.
  • Classifieds: Yandex includes Avito, Yandex Realty and Yandex Travel. Yandex.Travel is a service for organizing a business travel and provides travel reservations and hotel accommodations with focus on booking in Russia and nearby countries. Yandex.Realty is the Russian real estate market and Avito is the largest online classifieds marketplace in Russia, and both have large margins.
  • Mobility and Delivery: Includes Yandex Go for on-demand taxi service, car sharing, and other transportation offerings. Also contains Yandex Delivery service that delivers products from various locations (including restaurants). These provide a huge part of company revenues with high upside for further development and expansion, and a good part of the segment is a low margin business in Russia and neighboring countries.
  • Plus and Entertainment Services: Includes a variety of services from Yandex.Music, Yandex.Afisha (ticketing), Kinopoisk (movie streaming platform), and others. These services are not as large revenue generators as others.
  • Other Business Units and Initiatives: Yandex has a number of smaller business units like Toloka, Cloud, Autonomi, etc. These are not major profit centers currently but have a high growth potential.

Competitive Landscape

Yandex faces a dynamic competitive landscape, particularly in search and other consumer-facing services, where Google is a major global competitor (though, in Russia, Yandex holds the larger market share in search), and competitors in different industries are Yandex Mobility (and other ride sharing companies in different segments), food and grocery delivery (such as other players like Ozon and X5), and others. In the Russian market, especially, there is ongoing competition from new entrants as well as a need for further regulation by the Russian government, making the market difficult to predict.

Financial Overview

It’s essential to keep in mind that all figures for Yandex are reported in Russian Rubles and in US Dollars, except per share data. They also do not include data from businesses sold (especially after the business was restructured in 2023).

  • Revenue: Yandex’s total revenue for the full year of 2022 was 521.4 billion RUB, a 46% increase from the prior year. In 2021, Yandex’s total revenue was 356.2 billion RUB. The company had a healthy growth during the years before the 2022 Russian-Ukraine War which decreased the revenue and the margins for the business.
  • Cost and Expenses: Expenses, such as the cost of revenues and selling and marketing costs have increased as a percentage of revenues. In 2022, combined cost and expenses amounted to 89% of revenues (almost same as last year). This means that company struggles to control costs as they try to grow revenues.
  • Net Income: The net profit for Yandex had been 24.8 billion RUB in 2021. However, for 2022 they suffered a huge loss of 44.9 billion RUB. This is mainly due to an increase in other expenses and lower revenues due to geopolitical instability.
  • Operating profit: In 2021, operating profit for Yandex was RUB 111.4. In 2022 it decreased to RUB 35.5 billion because of high expenses.
  • Cash Flow: A look at Yandex’s cash flows from operations in 2022 shows a positive figure of RUB 50.2 billion. However, capex and other investment activities were too high, resulting in negative free cash flow.

Latest Developments:

  • Restructuring: In 2023, Yandex underwent a major restructuring, where most of its Russian operations were sold to a Russian entity, but a part of its international businesses was kept. This restructuring means that financial reports prior to 2023 and after 2023 are not consistent anymore. This also means that investors can’t be sure about the operations, profitability and growth of the new Yandex and have to re-evaluate based on new information.
  • Dutch holding: After restructuring, Yandex maintains its headquarters in the Netherlands as a holding company. In Russia, the company operates as a private Russian company.
  • New CEO: After the restructuring, a new CEO Artem Savinov has taken the reins.
  • Increased Competition: The company acknowledges increased competition in its various segments, with new players emerging and established players becoming more aggressive. This forces the company to spend more and reduces margins, profitability and revenue.
  • Data Security and Geopolitical Instability: The geopolitical risks of the company’s operation in Russian regions is increased, especially since 2022. The company also faces difficulties relating to data security of their clients.
  • Limited disclosures: Yandex has reduced its disclosures since the restructuring, resulting in fewer information being readily available to the investors.

Moat Analysis

Yandex has a difficult-to-classify moat. Here’s why:

  • Network Effects: Yandex’s search engine benefits from a network effect within the Russian Market, with more users leading to better search results and greater user base. The presence of other players however limits the moat.
  • Intangible Assets: The Yandex brand has considerable recognition in Russia and some of the neighboring countries. But its value is limited because other big tech firms have better name value. The various brands of its services (like Yandex Food, Yandex Go) are not a strong competitive advantage on its own.
  • Switching Costs: For some of its services like Yandex Go or Yandex Market, switching costs may be limited, but for others like Avito, switching costs are high. For services with large integration to their clients’ operations, such as cloud services, the switching costs may be more prominent, making the business a more difficult to replace.
  • Lack of Cost Advantages: The company has no noticeable cost advantages that would create a moat. They are not a low-cost service, instead they depend on scale and a better user experience.

Moat Rating: 2 / 5

The company has a narrow moat, primarily due to its market-leading position in search in the Russian market and its network effects, along with its services having high switching costs. However, other players are also gaining traction, the Russian economy is unstable, and government regulations might lead to decreased value and profitability over time. Also, the restructuring has made the company less global. The wide range of businesses and the risks inherent in operating in Russia make the future unpredictable.

Risks

  • Geopolitical Instability: Operations are highly concentrated in Russia, and the impact of the Russia-Ukraine war and other geopolitical issues can affect the company severely. The company has already sold most of its Russian operations for cheap, showing how much risk is involved in owning the business.
  • Economic Instability: The Russian economy is highly susceptible to fluctuations in commodity prices and currency values. Therefore, Yandex’s results are directly connected to economic conditions in the region.
  • Regulatory Risk: Russian government regulations relating to online businesses can change at any time, and such regulation could cause serious loss for the company. There is already much higher regulation and scrutiny of online technology businesses in Russia than developed countries.
  • Competition: Competition remains a constant threat to Yandex, especially in core sectors like search where Google is a big competitor, even in Russia. Other competitors are also trying to erode the network and other advantages of Yandex in all of its sectors.
  • Technological Obsolescence: As a technology firm, Yandex has to continuously innovate in order to stay ahead of its competitors. Failure to produce new innovative technologies will severely harm its operations.
  • Management Turnover: A lot of leadership has been changed and key management personnel has been removed or reassigned. This is never a good sign for the future of a company.
  • Lack of diversification: Most of Yandex’s income comes from one country with considerable geopolitical and economic instability. This means that if the situation in Russia takes a turn for worse, then there is little buffer to the company and its operations.
  • Lack of transparency: Since the restructuring, Yandex has decreased the number of disclosures. This means that it can be hard for the investors to understand how well Yandex operations are performing, and if the management team is competent at running them.

Business Resilience

The business has a moderate degree of resilience because of a good track record of operations, good cash flows from its operating businesses, and its technology, infrastructure and human assets. However, it also depends on a single country, making it extremely vulnerable to country risks. If its Russian operations are somehow compromised, then the company might find itself without any significant part of its business.

Understandability Rating: 2 / 5

Yandex is a complex company with a wide array of services and operations that are difficult to model using traditional DCF methods. A large part of its value and performance is based on geopolitical risk factors that are very difficult to evaluate accurately. The nature of its operations in Russia also makes it unclear on the future prospects and revenue potential, making the business hard to fully comprehend. Furthermore, the restructuring of the business has made it much harder to understand the company and the new future it envisions.

Balance Sheet Health Rating: 4 / 5

Yandex has low levels of debt and it has a lot of cash. However, a good portion of its assets are illiquid and hard to convert to cash. Also, most of its tangible assets are in Russia, which has high geopolitical risk. Overall, Yandex’s balance sheet is healthy, but one should consider some risks it is facing before giving it a higher health ranking.