Russia's internet major Yandex is maintaining ambitious plans in the e-commerce space for this year and sees its ecosystem as a key competitive advantage, Sova Capital wrote on March 11 after a call with Yandex executives and investors.

As reported by bne IntelliNews, in 2021 Yandex for the fifth year in a row topped the list of most valuable tech and internet companies with a valuation of $23bn. Its investment case now rests on developments in transportation, e-commerce and foodtech.

Sova noted that the management's plans left "a moderately positive impression", as search and ad segments, as well as ride-sharing, the company’s largest verticals, continue to recover, and Yandex "competitive position remains defensible". 

There is also upside potential in Yandex’s logistics services and Yandex.Plus, as well as in the commercialisation of the robot courier Yandex.Rover, Sova believes, while maintaining a Buy recommendation on the name trading at 2021-2022 estimated Price/Earnings of 50.5x-36.6x and Enterprise Value/EBITDAs of 29.0-19.6x.

Main segments remain solid
In the main search and advertising segment Yandex continued to show recovery in 2M21, rising by 14% year on year. The company still expects the Russian online ad market to grow in the mid-teens this year. 

"There could be an additional positive effect from the pre-installation law, which has not been budgeted for by the company yet," Sova noted.

According to the latest report by Kommersant, the Russian government might add a clause to its terms for the mandatory pre-installation of Russian apps on new electronic devices by April, with the law coming into effect also in April. 

Kommersant sources believe Yandex will be the beneficiary of such a ruling (59.9% total share and 55.7% on mobile versus 1% for Mail.ru search, according to Yandex). 

"It is not fully clear if a Russian search engine is planned to become the mandatory default or a mandatory part of the choice screen, and if Yandex is chosen as the beneficiary. Yet, it could be positive for Yandex’ search share over time," BCS Global Markets commented on March 15.

In the meantime, Zen continues to be one of Yandex key assets in competing with social networks. "Zen is comparable with major Russian social networks (e.g. VK) in the amount of time spent on the platform, but its revenue is growing faster," Sova commented, with revenues at RUB13.1bn ($178mn) as of December 2020 (up by 49% y/y). 

To compare, Mail.ru's VK (VKontakte), one of Russia’s largest social networks, generated RUB25.4bn in revenue in 2020 (up by 17% y/y in 4Q20 alone). 

Top 3 e-commerce goal
As followed by bne IntelliNews, Yandex intends to become one of the top three e-commmerce players (after Wildberries and OZON) in Russia by 2021, aiming at such competitive advantages as the integration of its e-commerce offering within the subscription service Yandex.Plus (8.5mn subscribers), on-demand deliveries with Yandex.Lavka e-grocery service.

"One of the main challenges in e-commerce is infrastructure development, which is the company’s key focus for now," Sova warns, noting that Yandex is testing various partnership options with merchants (e.g. drop-shipping by sellers) and improving the back-end.

Strong logistics
As reported by bne IntelliNews, Yandex will merge its transportation and e-commerce assets under a single vertical "E-commerce and Ride-tech", in addition to "Search, Advertising and Cloud Services".

"Yandex is very excited about its logistics opportunity, given this is a platform with a strong network effect (the density of supply and demand is important) and considerable profit opportunity," Sova Capital commented.

The company was able to increase the number of its B2B logistics service clients from zero in March 2020 to 15,000 by end-2020, and the company notes that these services are used by Yandex peers such as OZON and Avito. 

On the Yandex.Taxi joint venture with Uber Technologies, the company’s core ride-hailing service continues to recover, while the market position remains defensible, Sova argues. Foodtech and Yandex.Eats have not experienced a slowdown this year so far, and e-groceries Yandex.Lavka continues to develop rapidly. 

Self-driving business
Yandex is also Russia's leader in self-driving technology and in 2020 doubled its fleet of 100 self-driving vehicles. Operational driverless taxis were seen as possible by 2024 by the analysts.

"Although Yandex expects the commercial use of self-driving cars to start at least five years from now, commercial deliveries via its robot courier Yandex.Rover could become available next year," according to Sova Capital.

Yandex managers sounded quite optimistic on the prospects of Yandex.Rover, Sova analysts note, as it is a much simpler product (versus the autonomous cars) with easier tasks and less regulatory requirements. 

FinTech, media, cloud services could see upside
The company continues to explore FinTech opportunities, and is aiming to launch a financial service in the next 12 months. That said, Yandex has yet to share any details, according to Sova.

In a separate report by The Bell, Yandex is said to acquire small Russian bank Akropol (about Rb1bn equity) and may sign the deal shortly. Reportedly, the acquisition is solely for the banking license, which would be a base for building Yandex’s fintech vertical. 

"The deal would likely mean Yandex opting for mostly organic development of its fintech vertical," BCS Global Markets commented.

More upside could come from media services, as the company thinks that by the end of this year, the number of Yandex.Plus subscribers could reach the low-teen or even low double-digit millions (versus the current 8.5mn). 

Yandex's cloud business has the potential to grow 2.5x in 2021 and could deliver solid growth rates in 2022 and beyond, Sova believes.

"The costs in this business are mostly fixed, which creates scope to break even and generate further profit at some point in the future," the analysts commented; however, it is not fully clear the extent to which this business could grow versus the size of Yandex combined operations.