Growth is solid, but the stock looks pricey

Back in 2008, the Russian search engine Yandex (Nasdaq:YNDX) filed to go public in the U.S.? Of course, the timing was horrible.? The deal had to be scrapped because of the global financial meltdown.

But Yandex didn��t give up, and on Tuesday the company was able to launch its offering.? In fact, it��s the largest Internet deal since Google (Nasdaq:GOOG) as Yandex raised a cool $1.3 billion.?

Priced at $25, the shares jumped 31% on its debut.? That puts the valuation of Yandex at about $9.8 billion.

Is it too late to make money on this deal?? Or is there still an opportunity here?? Let��s take a look:

Pros

Russian Internet power.? Yandex is the No. 1 search engine in Russia, with a market share of about 64%.? During March, yandex.ru attracted 38.3 million unique visitors.

Yandex also has a variety of add-on services, like Yandex.News, Yandex.Market, Yandex.Mail and Yandex.Maps. There are also connections to mobile devices, which allow for location-based information.?

Economy.? Russia is one of the world’s top emerging economies.? Since 1998, the growth rate has averaged about 7% per year.? Yet the economy took a big hit from the financial crisis.? However, with a strong resources sector — especially in oil — there has been a recent turnaround.

The Internet and mobile penetration rates are still relatively small in Russia as well.? So there is much room for growth.

Talent.? Search engines are incredibly complicated.? Essentially, they must use applied mathematics to process massive amounts of information.? There also needs to be mechanisms to ward off manipulation of the results.

But Yandex has a top-notch team of engineers, which come from across the world.? The company even has several initiatives like the Yandex School of Data Analysis.

Cons

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Dependence.? Much of Yandex’s revenue comes from advertising.? So far, it has been a strong growth business.? For example, the company served 180,000 businesses in 2010.? Many are small and medium-size operations.

However, the advertising sector is highly sensitive to changes in the economy.?

Politics.? Despite many market reforms, Russia still has little respect for property rights.? There have been several high-profile cases where the Kremlin has nationalized assets or renegotiated contracts.?

Just recently, Yandex turned over information on some users to the FSB, which is Russia’s federal security service, to go after dissidents.

Competition.?? There are a variety of players in the search business in Russia.? Perhaps the most important is Google, which has about a 22% market share.

What’s more, the Russian government is creating its own search engine.?

Verdict

Even during the 2008-2009 global recession, Yandex was able to keep growing and producing profits.?? It is definitely a sign that there is a fundamental shift in advertising spending in Russia, which is likely to continue for some time.

Last year, Yandex grew its revenue by 43% to $440 million.? And the growth rate has even accelerated in 2011.

Despite all the success, investors should be cautious.? The political risks are real, and if the Kremlin does not get its way, it has little restraint in taking severe actions.? So in light of this — as well as the frothy valuation — the cons outweigh the pros on the shares for now.

Tom Taulli��s latest book is ��All About Short Selling�� and he has an upcoming book called ��All About Commodities.��? You can find him at Twitter account @ttaulli.? He does not own a position in any of the stocks named here.

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