“The Final Stage of the Internet Land Grab … One Stock to Buy if You Missed Google or Baidu”

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I don’t generally “pick on” the same newsletter two days in a row … but, well, the folks at Motley Fool Rule Breakers are filling up the e-waves with their ads, Gumshoe readers are pleading for answers, and we aim to please.

So today we’re sniffing out the pick that the Foolies tell us we can buy now to profit from the last stage of the internet land grab — the last big market where there’s still growth in internet penetration and where their teased stock has the pole position for profits.

Sound interesting? Sure, why not!

Like yesterday’s teaser, this “Investigative Report” from the Fool is penned by someone else at the company (in this case their Chief Investment Officer, Andy Cross), but the pick is from growthmeister David Gardner — here’s how Cross gets you interested:

“Lean in, because I have a confession to make: I missed Google. And I missed Baidu too.

“That’s not easy to admit. You see, I’m Chief Investment Officer here at The Motley Fool. And my boss, legendary investor David Gardner, had Google and Baidu circled for considerable gains years ago. And yet, I didn’t personally invest.

“That’s why I’m getting in touch with you today. To describe what could be our final shot to profit from the death throes of traditional, old-media advertising.

“On rare occasions, the market can indeed hand you a third chance…”

We can all identify with that, the pain of a missed opportunity — I’ve been holding Google (GOOG) since shortly after the IPO and have no plans to sell those shares, but I did part with my Baidu (BIDU) shares far, far, far too early, booking a decent profit but missing the stratospheric gains BIDU holders have enjoyed in the years since. Same goes for Intuitive Surgical (ISRG) and several other nosebleed growers, every investor can identify the opportunities they missed.

Which doesn’t mean, of course, that every growth stock is an opportunity. So … which one are the Foolies pitching today?

“… chances are you’ve never heard of this company. Despite the fact it’s following, step by step, the same path Google took almost 15 years ago… and Baidu successfully followed 10 years ago.

“Yet, this small company isn’t operating in the United States, which has the second-most Internet users globally. Or in China, which has the single greatest number of Internet users in the world.

“INSTEAD, the final stage of the Internet land grab will happen in a country with over 140 million people, 80 million of whom are about to get online in a big way….

“… pointing to an Internet explosion like the one we experienced here in the U.S. during the late 1990s. Take a look:

  • This country is number-one in social networking engagement, spending an average of 9.8 hours online every month, more than double the amount of the rest of the world…
  • Total hours spent online have skyrocketed 275% over the last four years…
  • Online advertising in this country jumped 56% in the last year alone… making it the single fastest growing market in all of Europe.
  • And the company I want to tell you about today has the ability to use its 60% market share to totally dominate the online advertising industry when the death of the traditional, old media empire begins to fall.”

Cross goes on to compare this company’s rise to the early days of Google — most of us know the story of how Google started as a project of two grad students at Stanford, Larry Page and Sergey Brin, and this company has a similar history …

“In an uncanny coincidence, two schoolboy buddies (sound familiar?) on the other side of the world founded a company in 1990. And in 1993, they began to use their native language as a basis for improving algorithmic-backed search results…

“In 1997, their search engine went live in one of the most prestigious and historical cities in the world. In 2000, the company incorporated as a stand-alone business.

  • Today the company gets over 50 million unique visitors in a SINGLE month…
  • It’s grown its share price by over 257% since December 2008 on NASDAQ….
  • And most importantly, it has over 60% market share in its home country, providing it with an enormous technological moat…
  • And similar to Google, this company is “of strategic importance” to its home country… In fact, rumor is that this country’s government has a “golden parachute,” and holds a 25% ownership stake, making this company almost invincible to a foreign sale…”

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There’s more, of course — pages and pages more, as is so typical of Motley Fool promo emails. But we don’t need another half hour of sniffing around to ID the pick for you.

The country the Foolies are teasing as the “internet’s final frontier” is Russia. And the pick they’re pitching here is Yandex (YNDX).

I agree that the growth in Russian internet penetration and e-commerce is one of the big themes we might be able to profit form in the years to come, and I’ve considered buying Yandex in the past — though I personally own a different player in the same sector that I think is well poised for outperformance.

David Gardner is apparently quite enthralled with Yandex — here’s a bit more from the ad:

“… followed up on the death of traditional old-media advertising with a brand-new recommendation in October 2012…

“And trust me when I tell you that they are excited…

“Recently, David had these things to say about the company:

‘We believe that… [the] founder-owner management team, growth potential in an underserved region of the world, and bargain stock price have set it up for outsized returns in the years ahead.’

And:

‘The shares [are] a screaming bargain…’”

So apparently YNDX was a pick for the Rule Breakers in October 2012, I don’t know on what day the pick was made but the shares right now are in the same general neighborhood as they were for much of that month, right around $24, so if they’re about to go on another big run you haven’t missed out just yet.

Will they? Well, that’s an open question. Yandex is expected to grow nicely as the internet penetration continues to increase in Russia, but for growth beyond that you have to think that Yandex can compete in non-Russian-language countries — they’re making a push for Turkey right now that they think will succeed in letting them establish a second place position there to Google, but it’s going a bit more slowly than they hoped. A year ago, Yandex was hoping to get 5% of the Turkish search market at the end of 2012, and it turns out they got up to about 2%. They still think they can get to 20-30% in 3-5 years, which would be meaningful both financially (Turkey is a pretty big country) and, perhaps more importantly, it would validate their ability to succeed outside the Russian language countries in their ambition to become a global competitor to Google.

Meanwhile, they do have Russia locked up pretty good — like Baidu in China, Yandex had the huge advantage of native language knowledge as they built their algorithms, and a business and brand that were built before Google had uncountable billions to throw at every country in the world. Now the competition is much stiffer, and any company that has ambitions to build a new search engine and advertising platform to compete with the entrenched leaders in a given country is facing an uphill march. That includes Google trying to compete in Russia, as well as Yandex trying to compete in Poland, Turkey, and elsewhere on the edge of their sphere of influence.

For me, I’m not so preoccupied with the possible growth and expansion into other countries. Yandex is all about Russia. Which is both good and bad.

Russia is a nightmare for businesses that cross the government or otherwise end up in the Kremlin’s crosshairs, as we’ve seen in plenty of stories pretty much every week about businesses being squashed because their leaders have spoken up against Putin and his cronies or otherwise raised the ire of the still strong security forces (latest story is here from Bloomberg, but there are many examples).

But it’s also a very rapidly growing economy with a young middle class, and a strong enough education system that it’s continuing to turn out some of the best programmers in the world. And though it’s harder to build a company and get funding in Russia than it is in Silicon Valley, it also costs a lot less … so there’s a pretty vibrant internet sector that’s trying to fuel the consumer internet revolution across the largest country in the world. Russian internet companies face the challenge that much of the country is not yet online or not yet connected to high speed service, that’s also a growth opportunity and they do begin with a core of high-speed urban customers in Moscow and elsewhere, particularly in Western Russia where the influence of Europe is felt most strongly.

So the argument for Yandex is that you get exposure to a strong market leader in a growing economy, where the internet penetration and e-commerce are about ten years behind the US (by most measures) and therefore there’s less concern about the potential growth curve flattening out anytime soon — there should be a lot of growth in internat advertising in Russia as high speed connections proliferate and the cultural adoption of online purchasing and credit cards take hold. And of course, you get the great Google-like business model that has been admired for years, with excellent margins, great ability to grow the business without cutting into margins, and a very sticky customer relationship as evidenced by their longtime stranglehold on a 60%+ market share (Google has improved substantially in Russia over the years, and is a major player and big employer there, but they’ve taken share at the expense of all the smaller participants, they’re not really taking anything away from Yandex so far).

The argument against them is that the stock is pretty expensive if you have any qualms about their growth rate, and they’re in Russia, one of the most difficult countries in which to do business. They carry a forward PE estimate of about 28, and are expected to continue growing earnings by 25-30%, so if the growth does continue to materialize that valuation is fine — if it doesn’t, that valuation is obviously worrisome. They have been growing earnings at close to 50% a year for their first few years as a public company, and they’re still only an $8 billion company so they do potentially have plenty of room to grow if Russia’s economy does reasonably well. Then again, Baidu (BIDU) operates in a much larger economy and is only a $35 billion company, and BIDU is expected to carry the same growth rate as YNDX but is more efficient and profitable and is priced at a significantly lower multiple (BIDU is at a forward PE of 13, with 30% growth expected).

And, as with China in past years and with Baidu specifically, there are also country-specific risks — if Russia cracks down on copyright and intellectual property, for example, then a lot of their web traffic and advertising dwindle because pirated movies and music are a large part of the consumer web … so you do get some risk to go with your growth, though I doubt that Russia will ever have as much control over their internet as the Chinese, and Baidu has done fine operating within that “Great Firewall of China.” When it comes to mobile internet usage, which is the driving force for most emerging market internet growth, Yandex does have a strong presence in mobile devices and their own browser and app stores, though there is also, as in most countries, a fear that the growing adoption of Android and the Apple iPhones will pressure Yandex if it can’t maintain a strong usage in those systems — particularly Android, which is designed to favor Google’s search engine.

So there you have it — do you want to buy in to the “final frontier” of the Internet? Think Russia and Yandex will make you tremendous profits as more and more Russians get high speed internet access in the decade to come? Or does the former Soviet Union worry you too much, or the valuation put you off? Let us know with a comment below.

And those of you who haven't retired yet, check this out as we get to the "planning and forecasting" part of the year...

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34 Responses to “The Final Stage of the Internet Land Grab … One Stock to Buy if You Missed Google or Baidu”


  1. I still remember the GOOG IPO, all the “experts” said it was overpriced at $125. Wonder what price they finally paid or if they stayed out?

    I think a lot more people would pick up some GOOG shares if they would do a split; back when it was trading with a 5 handle I know some people who picked some up, but those of us who are old school still hate to deal on odd lots.

    Roger.

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  2. Boo Ravens, from 49er land! We probably needed a couple more minutes!
    Travis, now that I’ve razzed you a little, how do you purchase Mail.ru? Schwab doesn’t
    recognize this as a symbol.
    Still a huge Gumshoe fan, but obviously not a Ravens fan!
    Franklin

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  3. This one was added to the Oxford Club’s trading portfolio in October. It hasn’t done much since and their pitch was very much along the same lines as this pitch.

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  4. @Frank Costley, the “dividend vault” is basically a claim that many major companies, such as Coca-Cola, P&G, Microsoft, Apple, etc., have a huge amount of cash assets that Tracy believes they will begin throwing off as dividends – especially “special” dividends – to shareholders over the coming years, or that they will use to repurchase their own shares, thereby increasing shareholder value. But he particularly touts the idea that such companies – elsewhere called “dividend achievers” and “dividend aristocrats” that increase dividends annually – will pay off in the long run by changing, for example, a constant 3% dividend that is accompanied by a rising share price into a high yield on the original dollar value of the investment. I.e., if you pay $5,000 today for a stock that yields 3%, or $150 annually, and if the company raises the dividend 10% annually on average, in 20 years the dividend will reach $1,000 annually, which would be a 20% yield on the original investment, and it would just keep growing from there. Supposedly, the share price of the company would also rise, keeping the current dividend at around 3% for that particular company, so the value of 100 shares in 20 years would have reached around $33,000. Tracy believes the cash these companies are hoarding now won’t be paid out all at once but will be used to support regular, generous dividend hikes.

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  5. It’s interesting that the various “expert” pitches all seem to share one thing in common- ‘diarrhea of the key board’. It seems these ‘pitchmen’ compete with each other to see who can pile on more bla-bla-bla. I appreciate your patience in wading through this blather to glean the facts necessary for the Thinkolator to do it’s work- thanks you!

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  6. BTW, Yandex is actually based in the Netherlands. I’m not sure if that means anything, but I’d imagine if it’s based in the Netherlands then it’s subject to Dutch law, etc., with is obviously waaaaaaaaaaaay more transparent than just about anything going on in Russia!

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    • I worry more about Yandex being at risk from Russia than about Yandex being risky because it’s Russian — meaning, I think the risk is not as much that Yandex hides stuff or reports fraudulent numbers because some Russian companies aren’t forthcoming, but that the Russian government can massively impact the business almost at a whim. Which is true whether they’re based in Russia or the Netherlands, I think.

      Obviously there’s plenty of risk to go around, but I’m more worried about political risk in Russia, both for this and other companies and for whole sectors of the economy.

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      • Travis, I agree, which is why I didn’t act on this recommendation. However, I do believe they will end up capturing a good slice of the marketplace they operate in. Here’s a bit from the OC write up;
        “Rivals like Google find it difficult to cut into Yandex’s dominance. Why? For starters, the typical search query in Russia is written in Cyrillic letters. The Yandex search engine uses proprietary algorithms and presents results in a neutral and user-friendly manner. It also features local knowledge. (Its search technology allows users to see results in more than 1,400 cities.)”

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  7. Russia? Internet? Freedom of speech? successful online company? Yeltsin/Putin money grab? Shareholders get wrong end of the stick? Some of them land in jail? No thanks.

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  8. My first thought along with many of yours was that investing in anything Russia-related was not a good idea. But, after thinking on this for a bit I’m starting to warm to the notion.
    My reasoning is that 5 years ago we wouldn’t even be having this discussion, and 10 years ago we would have laughed in the face of anyone suggesting investments in China stocks.
    China is only a few years away from becoming as blended in our investment psyche as most any American stock. Russia is not too far away from becoming the new kid on the American trading platform and the question is whether to be an observer or an investor – an educated investor, mind you, but an investor nonetheless.
    Travis, as always, has done a great job in peeling a lot of the skin off this potato, and the bottom-line is that this business and its model is being compared to today’s Google and Baidu – and yet it’s in a region and using a platform that the two veteran behemoths can’t compete with at this time.
    I shudder to think what today’s value would be of purchasing 100 shares of GOOG and BIDU in their beginnings (if anyone knows that please post – the accompanying shudder would just fuel my thoughts), but the Russian government is not at a loss from watching the growth and success of their communist Asian brothers in China. They understand that if they want to experience a similar economic boon they must lessen their choke-hold and old totalitarian militaristic way of thinking and living. Soon enough, a lot of the dinosaurs that continue to hold office will die off and/or the taste of capitalism and climbing out of poverty will grow so strong that the people may threaten revolution. Note also that recent government elections have not been easy on Putin and his cohorts. They know the writing is on the proverbial Kremlin bathroom walls (“the” Wall they also know no longer exists).
    I think if you have capital to risk and dream a little with, but on more sound information than not, this may be a place to do so, especially if Travis’ preference is not trade-able for most of us since it’s on the London exchange. I would, though, like to hear a little more opinion on the pink sheet alternatives aside from their greater illiquidity. I understand that risk, but can they demonstrate likewise returns to the London-based stock?
    Anyway, thanks for the platform. The soapbox is returned and sitting by the front door.
    Art

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    • BIDU’s IPO offer price was $27 in 2005, though it opened for trading in the $60s and the IPO mania drove it up to over $100 that day, and most folks probably paid between $75-125 if they tried to buy right away (it did then fall in half almost immediately before recovering, this would have been a wild ride — with worse to come during the financial crisis). Split adjusted, that would be between $5-15 depending on whether you want the open price or the trading close that day. So if you bought and held that you might have gotten something like 1,000% gains to this point, perhaps a bit more. When BIDU was first trading, the knock on them was that they were just a ripoff of Google, they were laden with bad sponsored results, and they depended too much on pirated music for their appeal. And Google hadn’t yet given up on mainland China, so there was fear of competition as well.

      Google’s IPO price in 2004 was $85, though it closed that first day at $100 (and has never split). Google has been an excellent investment over almost nine years, now up 750% or so if you bought in that first day. Wall Street analysts, spurred by Google’s strange IPO process, thought it was too expensive and my recollection is that it took a year or so for analysts to really get excited about the stock.

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  9. The ole boys at Motley Fool must be hung up in internet land. Last two story’s out of here is from them. As for the stock I really don’t have a thing against it its where its from that bothers me. Back few years ago I got the ideal I needed to put some bucks over seas and the Russian co. that was there big cell phone co. caught my eye so being the fool I am I bought it. Next thing I know I am in the red big time and walked away sorry I ever bought that bird. For give but I am old and can’t remember the name of it. So if you jump on this one watch it like a two year old kid. It may leave you high and dry and broke.
    Happy investing to all.

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  10. Rediff is an Indian based company that provides Internet services (ticker: RDEF). Less than $3 a share. But not earning much. Political climate probably better than Russia but financials not as good as Yandex. I am doing a valuation of Rediff. Might invest some mad money. it has the same advantages as Yandex. Knowledge of the language.

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  11. Russia’s population is approx. 142 million. What percentage could be classified as middle class, 20 %, 28 million altogether ? Less than California’s.
    China’s population 1.3 BILLION. 300 MILLION middle class approx..
    Baidu vrs. Yandex – No comparison !

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    • Yes, experts estimate the middle class at something in the neighborhood of 20-30%, though Russia is a hard country to figure and “middle class” is a squishy term no matter where you are in the world — the big advertising dollars and rising young consumers are in expensive European cities like Moscow, where having an average Russian “middle class” income might mean you’re living in a cardboard box. For mass population and immense size of the rising middle class it is indeed tough to beat China.

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  12. Hi Traviss,
    I know you are long Lonrho, as am I, and wondering what are your thoughts about the recent developments and price decline. Think this is more or less just a hiccup that’s created a really good entry price for increasing your holdings? I’m inclined to see it that way, but maybe I’m missing something? What do ya think?
    Allen

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  13. PT Telekomunikasi Indonesia (TLK:NYSE) is the internet provider for Indonesia. ($39.36 on 12th of Feb 2013) . Dividend Yield about 3.29. In a county of many Islands wireless makes sense. The company has land lines, wireless and internet services. GNP of Indonesia is growing at a 6.4% clip vs inflation at 5.3%. Has a net profit margin about 23%. I undervalue the company at $40. I will probably buy some shares after further investigation

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