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

Sleuthing the Motley Fool teased special report: "Following in Google's Footsteps: One Stock to Profit Off the Death of Old Advertising"

By Travis Johnson, Stock Gumshoe, February 5, 2013

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…”

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…

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“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.’


‘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.


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