beyondbrics

The moment Mail.ru and Yandex investors have been waiting for has arrived: Russia, at long last, has finally surpassed Germany to become the largest internet market in Europe.

According to comScore, the research firm, Russia had 50.8m internet users in September versus 50.1m users in Germany. And, luckily for those who bought into Russian internet stocks such as Mail.ru and Yandex at sky-high valuations, the market still has a lot of growth left.

With broadband penetration set to reach 60m people in Russia this year - a third of the population – there is still a large swath of the country where the internet revolution has yet to take hold.

GP Bullhound, a techonology-focused investment group, predicts there will be 93m Russian broadband customers by 2013. Of those customers, 71m will be using 3G mobile phones.

This is good news for big internet groups, such as Mail.ru and Yandex, which have spent the past year justifying their initial offering valuations.

While Mail.ru listed in London a year ago at a $27.70 per global depositary receipt, the company saw its stock fall to as low as $25 at the beginning of last month. On Monday it was trading around $31.82 per depositary receipt.

Meanwhile, Yandex, which  saw its New York stock surge as much as 68 per cent on its first day of trading to $42 a share, is these days trading closer to its $25 initial share price. On Monday its stock was down to $25.43.

Their share prices appear to be evidence that the two group’s initial valuations were inflated. But actually the companies have been surprising the market with better-than-expected earnings.

Yandex, for instance, announced at the end of last month that third-quarter revenue had risen 65 per cent to Rb5.2bn, beating analysts’ forecasts of Rb4.9bn, and raised its full-year revenue growth forecast to between 58 and 60 per cent.

Mail.ru Group said third quarter revenue rose 59 per cent to $124.9m and announced that full-year revenue would grow by 50 per cent.

What Mail.ru and Yandex still need to do is to convince investors that they have not just the largest internet user demographic in Europe but also the deepest.

According to comScore, Russia easily beats France, the UK and Italy for the number of its internet users. But it does not even enter the top rankings for the amount of time these users spend on the internet, falling behind countries such as the UK, the Netherlands and Turkey. While the average European spent 26.4 hours on the internet in September, the average Russian user spent just 22.4 hours.

So it will be up to Mail.ru and Yandex to convince the market that they can keep churning out higher than expected revenue numbers – not just on Russia’s own broadband growth, which will inevitably slow down over the next decade, but also through greater interaction with users themselves.

Mail.ru at least may have already won half the battle. vKontakte, a social networking site in which it owns a 40 per cent stake, is now the most popular site in Europe by number of hours according to comScore, with the average user spending a whopping 7.1 hours on the site during the month of September.

Related reading:
Russian internet front, FT
Russia number-one internet market in Europe, Vedomosti