Citi Sees Upside In Yandex 'Exhausted,' Downgrades To Neutral

Yandex NV YNDX shares have surged 27 percent since April 7. Citi’s Brady Martin downgraded the rating for the company from Buy to Neutral, while reducing the price target from Rbl1,150 to Rbl1,350. The analyst believes that after the run-up in shares, upside seemed “exhausted,” while incremental quarterly results are likely to soften.

Yandex reported solid Q1 results, significantly ahead of expectations; and shares strongly outperformed. The company generated 34 percent y/y sales growth, accelerating from 23 percent y/y growth in Q4 and 18 percent y/y growth in FY15. EBITDA margins expanded 6ppts.

Incremental Results To Decline

Despite the strong Q1 revenue growth, Yandex projected only 15-19 percent growth for FY16. Also, despite a 6ppt y/y improvement in Q1 EBITDA margin, the company has guided to up to 3ppt contraction for FY16.

Decelerating growth and contracting margins implied by the guidance would exert pressure on the company’s shares, analyst Brady Martin mentioned. He pointed out that incremental quarterly results were expected to weaken and valuation was no longer compelling, justifying the Neutral rating.

Yandex has addressed its key concerns. “Our recommendation upgrade in March was based on stabilizing search share, recovering ad market and margin expansion into FY17. All three factors remain intact, but the recent share performance largely prices this in,” the analyst wrote.