Yandex - A Zen Moment

We reiterate our BUY rating on Yandex while raising our target price 4% to R5,075 per share, or $65.90 per US-listed share. We continue to praise Yandex for its strong execution (which most recently helped it turn food delivery and car-sharing profitable) and for its ability to spot new opportunities, including with the recently launched Zen, which already contributes around 8% of ad revenues and which we expect to post a revenue CAGR of 41% in 2020E-23E.> Ad revenues to expand at 15.5% CAGR in 2020E-23E. We project that ad revenues will account for just 56% of total revenues this year, down from 80.5% in 2018, due to the growth of other verticals, particularly the taxi JV. Yandex (including its ad network) has a sizable share of the ad market (around 55%, we estimate), so it will be a challenge to grow in line with or faster than the market; however, we think it is certainly capable of this. One thing that is sure to help is Yandex.Zen, which is monetized mainly through ads. We expect Zen's share in Yandex's ad revenues to rise from 8% in 2020 to 14% by 2023. Also driving growth will be the further development of video, audio and hyperlocal advertising in Yandex's geolocation services (Maps, Navigator, etc.), which have a MAU of about 55 mln.> Yandex.Zen revenues set for a 41% CAGR in 2020E-23E. Zen is an AI-powered personalized content feed that Yandex introduced in 2016. According to Yandex.Radar, Zen's DAU in Russia reached 18.2 mln in September this year, which is nearly half of YouTube's DAU (32.5 mln) and double that of Facebook (8.2 mln), based on Mediascope data. Zen's user engagement stands at about 40 minutes per day, which leads us to believe that Zen can become a genuine alternative to social networks once it gets a significant user and content base. Video now accounts for 20% of total time on Zen versus 2% last year. We think that Zen's social elements, its appeal to publishers and its multi-format capabilities all make it attractive for creating content, and that all of this content should ultimately lead to further user growth, as well as an increase in engagement, which will also be facilitated by the personalization algorithms.> Valuation. On our estimates, Yandex is trading at a 2021E EV/EBITDA of 22.9 and a P/E of 39. Excluding the taxi JV stake and Yandex.Market, it is trading at a 2021E EV/EBITDA of 16.8. In our SOTP valuation, we still assign zero value for the self-driving group, which could potentially add around $12 per share. Key things to watch are the pandemic impact (Yandex held up well in October, much better than in 2Q20, although some verticals saw a minor slowdown in growth) and the development of the fintech vertical. Adverse regulatory changes (though we are unaware of any on the horizon) and well-funded competition are the key risks.