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Yandex NV: The Russian Search Engine Takes a Bite Out of Google

Yandex (NASDAQ: YNDX) is registered with the SEC as a Netherlands-based entity, but don't be fooled, this company is highly dependent on Russia where it earns almost all of its revenue. The company's primary claim to fame is as an internet search engine, which puts it in direct competition with Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google.

In June of this year, Google and Yandex had an approximately 50-50 split in market share for Russian search. But that's likely to change based on a settlement with Google over an antitrust claim.

A search engine underdog ...

Yandex is a much smaller company than Alphabet:

Metric Yandex Alphabet
Market cap $8.5 billion $650 billion
2016 revenue $1.25 billion $90.2 billion
2016 net income $112 million $19.5 billion

Data source: Yandex and Alphabet. Chart by author.

Yandex makes most of its money through online advertising -- the company search engine and branded websites combined with the ad network to account for over 95% of revenue last year.

Beyond search and advertising, this company has big aspirations. It has launched a ride-sharing business and is working on a new cloud-based web services business. The latter recently merged with Uber, and the two companies provided 35 million rides in Russia and nearby markets last month. 

However, doing business in Russia can be tricky, and the company's annual report highlights various risks associated with government policies, including the suspension of free trade with certain countries and potential restrictions on free access to the internet in the region. 

... but Russian regulators have put pressure on Google

In 2015, Yandex filed a complaint with the Russian Federal Antimonopoly Service, or FAS, claiming that Google was employing anti-competitive tactics with its Android operating system. Android devices sold in Russia had no pre-installed apps and services, including search, from any companies other than Google.

FAS issued a ruling in September that year stating that Google had breached antitrust laws. The company entered the appeals process and settled the case this past April.  

As a result of the voluntary settlement, Google will pay a fine of $7.85 million, and more importantly for Yandex, open its Android devices to other companies' apps. This means Yandex can work with smartphone manufacturers to pre-install apps such as Yandex Taxi or Yandex Maps, in addition to its browser and search engine.

As a practical matter, the company said it believes new Android devices shipped to Russia will offer customers the choice of choosing Yandex as the search engine for the Google Chrome browser by the end of this year. Older devices already in the Russian market will receive upgraded software opening up search options in 2018.

Image source: Yandex.

Yandex should start gaining market share

Company management stated that at the end of the first quarter, it had an overall market share in Russia of 55% for search. Its mobile share on IOS devices was 41% versus 38% on Android devices. One would expect that Android number to grow once the settlement takes effect.

Current annual guidance from Yandex points to 17% to 20% revenue growth in 2017, but that does not include the effects of the settlement, which may provide additional upside in the fourth quarter.

Foolish conclusion

With that in mind, the recent Google settlement should be a significant tailwind for the company. It will level the playing field between the rival search engines and in turn, boost ad revenue for Yandex.

But investors must reflect on their own investing style to decide whether Yandex has a place in their portfolio. The risks associated with the Russian market mean this stock experiences its fair share of volatility. Even if the company runs a strong, innovative business, it could be affected by events beyond its control.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Frank DiPietro has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Yandex. The Motley Fool has a disclosure policy.

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