(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
MATTIAS WESTMAN, CEO, PROSPERITY CAPITAL MANAGEMENT, IS INTERVIEWED AT BLOOMBERG TV
MAY 24, 2011
SPEAKERS: ERIK SCHATZKER, BLOOMBERG NEWS ANCHOR
MATTIAS WESTMAN, CEO, PROSPERITY CAPITAL MANAGEMENT
07:30
ERIK SCHATZKER, BLOOMBERG NEWS ANCHOR: If you thought LinkedIn was hot, wait until you get a load of Yandex. The Russian search engine company raised $1.3 billion in an IPO yesterday here in the United States on NASDAQ.
And at $25, the stock is valued twice as high on a price-to-earnings basis as Google. But Mattias Westman says the stock may still be worth your investment. Mattias is CEO of Prosperity Capital Management with his $5 billion under management.
His Russian prosperity fund was the second best performing hedge fund of 2010 according to Bloomberg markets. He's with us live from Paris this morning.
Mattias, 25 bucks. We have no idea whether Yandex is going to double on its first day of trading the way LinkedIn did. But at $25, you still think the valuation isn't out of control. How come?
MATTIAS WESTMAN, CEO, PROSPERITY CAPITAL MANAGEMENT: Well, I mean, it's a very attractive company, a very successful Russian technology company. The Russian market is growing quickly. The ad market is drawing repulses (ph) on Russian GDP. Internet is growing faster than the ad market.
And Yandex is taking market share in the internet market. And prices are rising so we'll see a very substantial revenue and proper growth in the next coming years.
SCHATZKER: But what substantial, because I want to draw a comparison to Google? I went back and looked at Google when Google IPO'd. Now, Google's revenue in 2002 was almost exactly what Yandex's was last year.
So on that basis, they're, at the very least, a little bit comparable. But at the time, Google was growing 10 times as quickly and was four times as profitable. And by 2005, Google had net income of $1.5 billion.
Do you think we're going see Yandex turn into a company like that two years from now?
WESTMAN: No, I don't think Yandex will be as big as Google, but they are taking market share. And they are the dominant player in Russia. And they're actually taking market share in other countries like Ukraine, Kazakhstan, Belarus and so forth.
And it's one of the very few companies in the world who've been able to beat Google at their own game. They have a 65 percent market share in Russia now. And I think they've actually been able to increase market share in the last few years further.
So only two other companies in the world have been able to beat Google - one company in China which probably had some advantages and one in South Korea. So yes (ph), shows the technological and mathematical confidence of this company unlike this...
SCHATZKER: Mattias, there are clearly many investors who agree with you. Otherwise, they wouldn't have been willing to pony up $25 for the stock yesterday, well above the top end of the target range which was $22. But I guess I have to come back to the valuation question because it's being priced at 18 times revenue.
On that basis, Google IPO'd at 15 times revenue. Now, we know what's happened to Google since then. It grew like crazy. It's still growing at a very fast rate. But people have become a little bit jaded about Google's growth prospects.
Surely - well, I'm not going to say surely - I guess the question is to you - does Yandex not face a similar future? Again, maybe expectations are getting ahead of themselves.
WESTMAN: Well, I mean, Google's growth has slowed down very significantly in the last couple of years. Of course, Yandex's growth will continue unabated for a good few years. But sure, this is not a very cheap company.
I'm not trying to say that. It's a very good company. It's an example of how good engineers and good mathematicians you do have in Russia. And I think their market share in Russia is going to remain very strong.
But there are probably some companies in Russia which are cheaper. The average P/E of the Russian market is in the region of six. So that's quite a lot less than what Yandex is going to trade at. But we've certainly (ph)...
SCHATZKER: Well, one of the reasons that P/E for the Russian market is lower and I don't need to tell you this because you're an expert in Russian investing, are concerns that some Western investors have about things like the rule of law in Russia.
You know, the running joke about LinkedIn is that the risk factors in its registration statement ran to 19 pages. In the case of Yandex, it's 30 pages. Should Western investors be comfortable investing in Russia the way you are?
WESTMAN: Well, I think they should. I mean, clearly, Russia is not a mature market. There are lots of problems. But our experience, however, you know, investing in Russia for more than 15 years is that things are getting better all the time.
There is improvements, both in terms of the economy, both in terms of manager share protections. And that's why we've seen this fantastic profit growth in a lot of the Russian companies and had a good return on our funds.
So you know, there's no doubt that there will be further scandals from time to time. But you're getting well-paid for that, compared to the growth that you see in the low valuations that we have now.
SCHATZKER: So what is the overhang? I mean, can you quantify the risk overhang? I guess another way to ask the question is how much higher might Yandex have priced at if it weren't a Russian company with 30 pages of risk factors?
WESTMAN: Well, it's hard to quantify that. I mean, if you weren't a Russian company, you know, this market would be a lot more mature. And so the future growth would not be as great as it is now. So you know, it's part of the same parcel (ph).
You have a market that is developing quickly and has some problems. And people are making assumptions and we agree with those assumptions that these problems are being resolved. Russia is becoming a more and more normal economy. And therefore, you know, things like infinite ad spending is growing quickly.
So you can't have one without the other.
SCHATZKER: Mattias, thanks so much for joining us as always. Mattias Westman of Prosperity Capital Management, the second best performing hedge fund, according to Bloomberg markets.
Last year, he was talking to us about Yandex. He doesn't think the valuation on that stock is out of control after yesterday's $1.3 billion IPO.
07:36
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