TMT sector: focus on value

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Author: Stock Analyst  Date: 2021/04/29

A Reuters poll of 500 economists revealed expectations of a rapid economic recovery, at the fastest pace in 50 years. Optimism is based on both vaccination successes and unprecedented financial investments, primarily in the United States.

The recovery will be led by the United States, where growth is expected to hit a record since 1984, and China, whose economy will return to pre-crisis levels later this year. Investors are clearly interested in investing in securities of companies in recovering industries, which may lead to the sale of shares in the TMT sector, which have already significantly increased in value over the past year. In Q2 2021, value stocks are becoming the most popular investment idea in the IT sector. Today, companies of the "traditional" economy are usually referred to in this capacity: extractive, energy, medical industries, which are opposed to "high-tech" as a growth sector. The abbreviation TMT is used to refer to tech-media conglomerates (Telecoms-Media-Technologies). In our opinion, value stocks are not uncommon in this sector as well.

Information and telecommunication technologies (ICT) and media are now at a stage of maturity. ICT costs account for approximately 5% of world GDP and are increasing in line with the growth of the world economy. Among the reasons holding back the growth of the sector, not only its solid size, but also the uncertainty of expectations, protectionist policies, geopolitical tensions.

Cloud technologies, Big Data, artificial intelligence, fintech and e-commerce continue to attract investor interest. Large and "forgotten" last year IT-companies have already taken strong positions in these industries, which is beginning to affect the financial results. Investors are finding that new businesses are not necessarily the most successful in new industries.

We also expect continued strong growth among the leaders of the semiconductor industry, especially niche ones, whose products are used in growing markets such as 5G, data centers, and the market for electric and hybrid cars. Builders and operators of data centers will continue to be of interest.

During the pandemic, ICT spending fell by only 3%. Now it has become a problem with bigtech shares

Gartner researchers have estimated the global cost of information and communication technology (ICT) in 2020 at $ 3.7 trillion. This is $ 200 billion more than expected ($ 3.5 trillion). Losses compared to the previous year took place, but amounted to only 3%, while 7% was predicted. In absolute terms, the decline amounted to $ 100 billion. Exactly the same estimate of losses was given by IDC researchers, who, however, believe that the market itself is slightly larger ($ 4.0 trillion). Most of all - by 14%, the researchers were mistaken in assessing the fall in costs for data centers, which did not decrease at all, but remained at the same level. Hardware costs were down 8%, down from a projected 17%.

We listed the factors of rapid recovery of the largest IT companies more than a year ago in the article "10 reasons why the largest IT companies will be the first to come out of the crisis." We objected to the idea that the value of all ICT companies, regardless of their size, would quickly recover, and we predicted that the largest companies - the so-called "bigtech" - that is, Apple, Amazon, Alphabet and Microsoft - would recover the fastest. The growth in the value of these shares in the past year far exceeded our expectations, in fact, it was in them that all the enthusiasm of investors was concentrated. Last April, we promised that the capitalization of these companies would return to $ 1 trillion, but for Apple it already exceeds $ 2 trillion, and for the next three - $ 1.5 trillion, and Microsoft has almost caught up with Apple.

Now the idea of ​​quick recovery is exhausted. The success stories of the introduction of artificial intelligence of the third and fourth waves should become a new driver of growth. These are smart devices and unmanned vehicles. The markets will obviously be big, but the idea will have to wait another five, maybe ten years before the idea is implemented. Investors intend to make money on economic recovery now.

However, Gartner researchers report that corporations plan to increase their ICT spending more than expected, which means that BigTech's financial results will also improve. However, this information is no longer new to investors, and these expectations have already been taken into account in prices.

We forecast that in the second and third quarters of 2020 in the TMT sector, investor focus will shift to value equities. First of all, this will have a positive effect on the shares of companies "forgotten" by investors last year for the sake of "bigtech".

ICT market structure and development vectors

Although the ICT market has rapidly growing segments, it is generally mature and structured. The market structure is stable over time and changes by no more than a percentage point per year. The share of the telecommunications and hardware sectors ("hardware" and "gadgets") is slowly declining, while the share of software and data centers is growing. The largest sector of the ICT market is telecommunications (communication services), but their share, which is now 37%, is decreasing by about one percentage point per year. The share of IT services is kept at 27.5%. The share of hardware is stable at 18%. The share for corporate software is slightly smaller (13%), which increases by a percentage point over two to three years.

In the US and Europe, the telecommunications sector accounts for less than 30% of total IT spending. In the United States, this is 25%, which is one and a half times lower than the global average - 37%.

The average share of telecommunications is typical for Asia, and in the rest of the world this share rises to 50%. In contrast, the IT services sector in the US and Europe accounts for more than 30% of costs, while in other regions the share is half. The cost of software in the United States exceeds 20% of the total cost of ICT, in Europe - about 16%, and in other countries they are still at the level of 5%. In Asia, the share of hardware production is abnormally high (38%), In the United States, the share of hardware costs is already less than 20% - including due to the transition to a cloud-based business model, when computing resources are acquired as services (IaaS and PaaS- model).

We expect new US IT services and software companies to gamble on global expansion into the rest of the world, where they face little resistance. However, this process is not as fast as the economic recovery in the United States, and these companies, as a rule, are already very expensive from the beginning, and their multipliers are extremely high. Therefore, we expect investors to decline to new companies in this segment in favor of large IT companies with a significant share in the European and US markets.

Telecoms and media need 5G success stories

Formally, telecoms got off with not very significant losses from the pandemic - in 2020, according to Gartner, their revenue decreased by 2% (against the expected 3%). The main expectations are now placed on the implementation of the 5G standard. It is the only simple and powerful technology-driven growth driver that does not involve heightened competition in related areas. However, demonstration of companies' success stories is increasingly required, and it is possible that telecoms will have to take on more responsibilities than providing communication services. For example, Kevin Westcott (Deloitte) noted that telecoms need to help customers see the revolution in their industries with the help of 5G. This point of view is concretized in three provisions:

  • Studying the client's tasks and proposing solutions;
  • Convergence of entertainment services;
  • New positioning.

It follows that neither the clients themselves, nor third-party developers have yet come up with new services. Moreover, in order to sell these services, which do not exist, operators will need to position themselves in a new way, and it is not yet clear how (apparently in "digital partners" or even "digital concierges").

Recall that in the past, telecoms acquired a lot of video resources, but so far they have not demonstrated significant success in revolutionary media transformations, and it does not follow from nowhere that they will turn out to be more successful mentors in other industries. Although the development of new 5G services is in the brainstorming stage, to which consultants and operators are invited, the implementation of this standard is revitalizing the b2b segment of telecommunications.

Confirmation is the rise in the share price of T-Mobile (TMUS). The company's share price has grown by 42% over the year and is now $ 131.7. Capitalization exceeded $ 164 billion, and a quarter earlier, at the time of our previous note, it was $ 153 billion. Thus, this year the company has risen in price by 7%. EV / Revenue is 3.8 and P / S is 2.4. The difference in ratios is attributed to significant liabilities ($ 135 billion), which is typical for all large telecommunications companies. The multiple to earnings P / E is 49.8 and the forecasted is 39.2. Despite the rather high value of this multiple, the leader of the American 5G last fall did not go unnoticed by the managers of Warren Buffett's holding, Berkshire Heathaway. They invested about $ 2.5 billion in T-Mobile. Their investments in their main competitor, Verizon Communications, soon followed. Indeed, T-Mobile and Verizon's business models are relatively straightforward and designed for long-term growth, in line with Buffett's investment philosophy. We continue to expect the price of T-Mobile shares to rise to $ 160 by the end of the year, or 22% from today's level, and we recommend “Buy” for the shares of the company.

Shares in America's most expensive telecom, Verizon Communications, Inc. (VZ) fell 3% in January when the company reported higher earnings per share, while revenues and subscriber base declined. The new quarterly reports on April 22 did not drop them so much - by 1.5%. Although this time quarterly revenue increased (4% year-on-year), the subscriber base continued to decline. In addition, there is not much progress in the distribution of 5G, despite the significant costs of acquiring licenses ($ 45 billion), which increased the company's debt to $ 247 billion. With an EV / Revenue multiple of 2.35 and a P / S multiple of 1, 3, the holding's shares are the obvious representative of the value family. The projected dividend yield on the shares is 6.94%. Our end-of-year forecast for the share is $ 61.8, up 8% from today's price. The recommendation is "Hold".

Russian telecoms are the best illustration of the dominance of value stocks in the TMT sector

PJSC Rostelecom, whose revenue in 2020 (including the acquired Tele2) amounted to 546.9 billion rubles. (+ 15% to the previous year), has acquired the status of the largest Russian company in the TMT sector, which benefits as much as possible from the transition of the economy to digital rails. Rostelecom's strategy is a growth strategy to the extent that it is generally possible for the largest national operator. Achievement of revenue of 700 billion rubles. in 2025 means an average growth rate of 5%, which is much higher than the indicator typical for domestic telecoms in recent years. No other Russian company in the TMT sector, while fulfilling such plans, will be able to come close to Rostelecom in terms of revenue. At the same time, the company does not plan to increase CAPEX in the coming years.

Rostelecom is strengthening its dividend policy. On April 21, the president and chairman of the board of the company Mikhail Oseevsky announced that the company plans to annually increase dividend payments by at least 5% year-on-year, based on a starting point of 5 rubles per common and preferred share. At least 50% of net profit will be allocated for dividends. However, in the future, dividends will be paid once rather than twice a year.

Such growth rates can be achieved due to the active development of "digital" areas, including those discussed in this report. First of all, these are cloud technologies. For the development of RTK-DPC, which may become the largest cloud-based Russian company, the operator attracted investments of VTB Bank in the amount of 35 billion rubles. In addition to the fact that Rostelecom is the largest data center operator, the company is increasing its expertise and client base in the big data processing segment.

The second area of ​​aggressive growth is information security. The third area is digital medicine. Finally, it is obvious that Rostelecom will remain the largest player in the digitalization of public services, an indispensable participant in projects to create smart cities, transport networks, etc. Together with Sber, the operator will develop a Unified Biometric System. Such a system will become a necessary component of the implementation of artificial intelligence of the third wave, widely using sensors. Rostelecom publishes its annual Trend Monitoring study (DigitalTrends.rt.ru), in which future growth points are calculated based on an analysis of large amounts of scientific and business literature.

If the company manages to meet the planned growth rates, it will maintain a significant gap in revenue from other companies in the sector. Our recommendation for Rostelecom common shares is Hold, with a year-end target price of RUB 115, which is 8.7% higher than their current value of RUB 105.7. While the capitalization of the leader of Russian ICT at the level of 292 billion rubles. looks like an annoying misunderstanding, it is not yet clear which investors' enthusiasm could increase the demand for the paper.

MTS PJSC also showed good results in 2020: revenue growth by 5% (amid a 3% decline in the global telecom industry). The projected 4% revenue growth in 2021 will not close the gap with Rostelecom.

In the case of MTS, the prospects are uncertain. The company has a chance to become one of the largest digital ecosystems in the country. On the other hand, it can go to this in an unobvious way. For example, in 2019, the company sold its 18.7% stake to Sistema, Ozon for 7.9 billion rubles, which means the marketplace is valued at $ 670 million - 20 times cheaper than it is currently estimated by the market. It could be assumed that everyone was mistaken then, but recently Forbes magazine reported that in June 2020 Sberbank was going to enter the capital at an estimate of $ 1.4 billion - twice as expensive, but AFK Sistema did not sell it. Now the market estimates Ozon at 769 billion rubles, and MTS - at 632 billion rubles. This, of course, makes one wonder how limited the telecom operator is in the possibilities to build this hypothetical ecosystem profitably and which company will ultimately be chosen as the central player. In such conditions, it is, of course, difficult to blame the market for a tough approach to the operator's assessment. The market has a feeling that the company's priority is to help the main shareholder in solving its problems. The second priority is paying high dividends. This situation suits all parties, although it does not contribute to the growth price of the operator's shares.

MTS announced the recommendations of the board of directors on the amount of dividends for 2020. They will amount to 26.51 rubles per share, thus the dividend yield is 8.3%. Our target price for the share is RUB 320, with a Hold recommendation.

The hardware market, which has experienced the largest decline in the ICT sector, will benefit from the recovery period

The hardest hit by the coronavirus pandemic is the hardware sector, where revenues have declined by 8% in the past, according to Gartner. But if earlier Gartner predicted in 2021 the conservation of low costs with cost growth rates of only 2.4%, now the forecasts have been raised to 8%. Growth rates for 2021 are also dramatically increased from 2% to 5%. Having suffered along with the traditional economy, the hardware segment will recover with it.

Intel (INTC) shares have won back 20% of the value since September last year, lost earlier on the news about the success of NVIDIA and the refusal of Apple (AAPL) from using Intel processors and developing their own. The return to Intel of Patrick Gelsinger, a former CTO who had been forced to leave the company a decade earlier and who has successfully led VMware (VMW) since then, has been a boon. Gelsinger accepted an invitation to lead Intel as CEO, rejected an idea by activist investors to sell the company piece by piece, announced a plan to build a processor that surpasses Apple's design, and pledged to develop specialized processors for automakers within a few months. With EV / Revenue multiples of 3.49 and 3.27, respectively, Intel stock is a typical value stock. The P / E ratio is only 12.7 and the projected 13.4. Dividend yield - 2.18%. We continue to expect Intel's share price to rise to $ 67 by the end of the year, up 8% from the current $ 62 value, and have a Hold recommendation for the company's shares in portfolio.

Qualified investors may be interested in shares of Allegro Microsystems (ALGM), a manufacturer of microchips for magnetic sensors, a former US subsidiary of Japan's Sanken Electric. Co. The company sells over 100 million devices for driver assistance systems, self-driving cars, and data center cooling systems. The average IPO price of the company that IPO on NASDAQ at the end of October was $ 13.0, and now the share is twice as expensive - $ 26.0. The company's capitalization is $ 4.9 billion. The P / S multiple is now 8.3, and the EV / Revenue multiple is 8.1.

We expect Allegro Microsystems' share value to rise 35% over the year to $ 35. The main driver of growth is the growing market for hybrid vehicles using both an internal combustion engine and an electric motor. Until the company is included in the leading indices (S&P, NASDAQ 100), its securities are available only to qualified investors.

For NVIDIA (NVDA), the undisputed revolutionary of the processor industry, the main event should be the takeover of processor manufacturer ARM, which was announced in September 2020. It was expected that due to lengthy coordination of the issue with European regulators, the transaction will take a total of 18 months. So far, the results of the agreement are rather negative. On April 20, the British Minister of Digitalization, Oliver Dowden, announced that due to the problems of national security, the issue requires more careful study. As a result, since the beginning of September last year, NVIDIA shares have risen in price by only 3.6%. For a company with a capitalization of $ 381 billion, which is exactly one and a half times higher than Intel's capitalization, it is difficult to grow further without acquisitions.

Increasing gaming realism and graphics performance requirements will continue to drive high demand for NVIDIA gaming GPUs in the future. This trend should be supported by the proliferation of high-resolution displays. We also look forward to continuing to strengthen NVIDIA's position in areas such as artificial intelligence, deep learning, supercomputing and data center. Quite good prospects in the long term are associated with the expansion of the use of NVIDIA chips in the automotive industry.

NVIDIA's financial results over the past year have been strong. The company was able to significantly improve all of its key metrics thanks to strong performance from the gaming division and data center solutions. Meanwhile, these factors, in our opinion, have already been taken into account in the price of NVIDIA shares, and their upside potential looks limited.

We have a Hold recommendation for NVIDIA with a target price of $ 685 as of January 31, 2022, implying 7.6% upside.

Cloud companies and artificial intelligence at an affordable price

From our point of view, the time has come to invest in shares of large companies actively working in the cloud market - SalesForce (CRM), Oracle (ORCL), VMWare (VMW), and Microsoft (MSFT). These companies are strengthening their presence in the adjacent big data and business intelligence market. The prospects of IBM (IBM) are not so obvious - the company once again changed its strategy, abandoned the service model bequeathed by Lou Gerstner and focused on cloud services, spinning off infrastructure services under the Kyndryl brand as a separate company. The market is still pondering the success of this venture.

SalesForce (CRM) stock is now priced at $ 231.3. Over the year, they have risen in price by 50%, but are well below the August peak ($ ​​284.5), reached at the time of the announcement of the company's inclusion in the Dow Jones Industrial Average. So far, the market does not like the expected expensive purchase of the business messenger Slack (WORK). However, the popular messenger is a necessary component of the platform, and without acquisitions, the further growth of a corporation with a capitalization of $ 212 billion cannot be ensured.

The P / E multiple is high (52.8), and the predicted multiple is even higher (55.8). At the same time, thanks to high and growing revenue, the EV / Revenue multiple is a solid 9.77, and the P / S is almost the same (9.99).

We continue to expect SalesForce shares to rise to $ 287, up 24% from current levels. However, we recommend “Hold” on the stock.

Information security companies have gotten to social engineering

The rapid growth in the number of cloud and mobile services, e-commerce and financial technology has an abundance of "holes" in information security. Regardless of whether the industry itself exaggerates the damage (estimates range from $ 1 to $ 6 trillion), everyone, including corporations and individuals, begins to feel the loss.

An increase in the penetration of mobile devices and smart gadgets, an increase in the share of data that is stored and processed remotely, lead to an increase in the number of cyber attacks by 11% annually. The Global Market Insights forecast promises the market more than $ 300 billion in revenue in 2024. Among the leading market players are Microsoft, IBM, Intel, Oracle, Cisco, Vmware and ServiceNow. By investing in the shares of these companies, you can make money in the cybersecurity market. However, specialized companies are also of interest.

Fortinet (FTNT) is now trading at $ 201.9 per share, up 27% from a year ago. The company's revenues for 2020 amounted to $ 2.59 billion, market capitalization - $ 33 billion. Today this company is the largest specialized player in the information security market. Its solutions include SD-WAN technology integrated into firewalls, vendor-to-customer video in Home Office for "home supervisors" whose uninterrupted operation is critical to business. At the time of publication of our previous strategy, FTNT was worth $ 146 and we forecast its value to rise 14% to $ 170 over the course of the year. However, the share price has already risen by 38%. At the same time, the consensus price forecast published by Yahoo Finance rose to $ 188, and 21 out of 30 analysts recommend buying the paper.

However, we believe that the value of Fortinet's gains has already significantly outpaced the gains in the market, and we recommend the stock as Hold. You can buy them if the price drops below $ 170.

Check Point Software Technologies (CHKP) develops software and hardware systems, including firewalls and virtual private networks, and offers a complete security architecture that protects both enterprise networks and mobile devices, as well as the most complete and intuitive system management security. Check Point's capitalization is $ 16.1 billion.

The Infinity Total Protection platform opens the door for companies to strengthen their position in such large and growing sectors as cloud storage and the Internet of Things. CloudGuard Connect and CloudGuard Edge extend the end-to-end protection of enterprise cloud SaaS applications, cloud infrastructure, and data against fifth and sixth generation cyber attacks. The new line of Quantum Security Gateways includes 18 models offering advanced cyber security to enterprises of all sizes. In early March, Check Point unveiled Harmony, a unified solution for secure connectivity to any resource and endpoint protection. Check Point previously acquired Cymplify, a startup specializing in cybersecurity solutions for the Internet of Things (IoT). The large-scale deployment of 5G communication networks should give additional impetus to the development of IoT, as well as increase the demand for protecting connected "things" from cyber attacks. Check Point recently introduced an IoT Protect solution based on Cymplify technologies, which should allow the company to strengthen its position in the IoT.

We rate Check Point Software Technologies (CHKP) Buy with a target price of $ 142.1 per share, implying 19% upside from the current price level of $ 119.8.

NortonLifeLock (NLOK) is commonly cited as an example of value stocks in the cybersecurity industry, an antivirus software maker that is significantly undervalued by the market compared to other companies. However, in our opinion, the market rates anti-virus vendors as a whole relatively low, giving preference to cloud and network security now.

In this regard, Telos Corporation (TLS) is of interest, providing "invisibility" on the Internet to the American security forces. The company's share is now worth $ 33, while in November the range was $ 16-18.

The ETFMG Prime Cyber ​​Security ETF investing in information security is recommended  and provides an opportunity to invest in the industry as a whole.

We also inform you that trading in KnowBe4, Inc. (KNBE), a corporate platform for protecting against cyber-phishing attacks, launched triumphantly on the NASDAQ, immediately increasing in price by 51% compared to the average placement price. This is the best result of the past two weeks for tech companies. KnowBe4's bestseller is training from social engineering pioneer, famed hacker, Kevin Mitnick, who provides businesses with a continuous provision of employee training through the use of phishing (including SMS, mobile and video, not just email), pre-text, and other cutting-edge technologies against them. methods of cyber fraud. The capitalization of this innovative company is now about $ 4 billion, which is comparable to the capitalization of Mail.Ru Group.

Ecommerce: Researchers Raise the Bar

E-commerce is a close industry to TMT with comparable turnover. The pandemic has dramatically accelerated the transition to online commerce and the shift in the traditional retail business model. The new model is dominated by massive marketplaces armed with billions of transaction data and logistics. In addition, there are thousands of "partners" - stores that provide the product. Specialists who have switched to telecommuting are forced to give up visiting stores and purchase all the necessary goods online. They do not have time to search for products across thousands of sites; it is necessary that all products and services be available at one point.

The volume of global retail, including online and offline, was estimated by eMarketer at $ 26 in 2020, while the share of online sales is only 16.1% so far. This share is expected to rise to 22% in 2023. Interestingly, the share of online commerce in the total volume of trade in the United States is now estimated at 9-10% and it remains approximately constant. In Russia, a similar share, according to Data Insight, was 8% in 2020, and by 2025 it will increase to 26%.

Currently, 62.6% of the e-commerce market is in the Asia-Pacific region, 19.1% in North America, 12.7% in Western Europe. The record holder for the growth rate is now Mexico, followed by the countries of South and East Asia.

Alibaba (BABA) is China's largest online trading company. In addition to the marketplace, Alibaba's assets include logistics services, cloud business, fintech, and media.

The main sources of revenue from e-commerce are: Tmall - a platform for the sale of original goods from official brands, focused on the middle class; Taobao (the name can be translated as "in search of treasures") - C2C-marketplace containing hundreds of millions of goods of any type; and Alibaba, an international B2B wholesale that connects suppliers and buyers from over 190 countries.

Alibaba claims to take away from Google the title of the third largest cloud provider in the world (after Amazon and Microsoft). Alibaba owns Youku, the third most active video user in China, and Alibaba Pictures. Alibaba is one of the global leaders in artificial intelligence applications.

The main risk for Alibaba is regulatory pressure from the Chinese government. In November 2020, the regulator stopped the IPO of Alibaba's fintech subsidiary Ant Group. The company could be valued at $ 320 billion and raise $ 34 billion, making it the largest IPO in history. The official reason for the cancellation of the IPO is the tightening of the rules for issuing loans to the population on the part of online platforms: from 2022, online platforms will have to finance at least 30% of the loan amount, which will significantly affect Ant Group's business. The government's actions pushed Ant Group's estimate to $ 108 billion, according to Bloomberg Intelligence. Ant Group is currently undergoing restructuring to meet new regulatory requirements. According to Western media reports, one of the requirements is the withdrawal of the founder of Alibaba, Jack Ma, from the shareholders of Ant Group.

The P / E multiple is moderately around 25. We rate Alibaba Buy with a target price of $ 312.1, with a 36.0% upside potential for the rest of the year.

A significant part of the e-commerce market, worth $ 92.91 billion, is in Central and Eastern Europe - a region that includes Russia. Russia, according to eMarketer, at the end of 2019 was among the top ten countries in terms of growth in e-commerce turnover. The rates in our country were 18.7%, slightly inferior to the world average of 20.7%. In the fall, an unusually successful placement of Ozon Holding (OZON) for the Russian company took place on NASDAQ and the Moscow Exchange.

In July 2020, DataInsight researchers published a forecast that from 2019 to 2024 the Russian market for sales of tangible goods via the Internet will grow from 1.7 to 7.2 trillion rubles. The average growth rate of online commerce from 2019 to 2024 (CAGR) according to their forecast was 33.2%. Unlike eMarketer, they believe the coronavirus is not slowing down, but speeding up online retailers. DataInsight estimates that growth would have been only 26.6% in the absence of an epidemic.

At that time, the projected rates looked unusually high, the reality far exceeded even the expectations of optimistic researchers, not to mention analysts. Ozon's revenue in 2020 increased by 80%. The financial results of the largest Russian marketplace Wildberries, whose IPO is dreamed of by wide investor circles, increased by 96%. Although the success of mid-sized stores was much more modest than that of the leaders, the total volume of the Russian market grew by 59% to 2.7 trillion. rubles.

Taking these results into account, DataInsight not only did not moderate, but also strengthened its forecast. The growth rates will remain at an average level of 34% until 2025, following which the turnover will reach 10.9 billion rubles. or 26% of the total trade turnover in Russia.

As a result, Russia is witnessing a boom in so-called ecosystems, including a bank (as in the case of Sberbank) or an IT holding (using Yandex as an example) intending to make money on the e-commerce market using big data, artificial intelligence and marketplaces that acquire banks and accumulate data.

Mail.Ru Group is the leader of Russian online communications, reaching the maximum audience and possessing more data on the behavior of Russians in social networks and instant messengers than any other company. The holding has set the task of becoming an integral part of the Russian e-commerce infrastructure.

Working in the global gaming market allows the company to increase revenue from the gaming segment by 140% in certain periods. During the period of contraction of the Russian advertising market, which contracted by 4% at the end of the year, diversification mitigated the consequences of the realized risk. Mail.Ru Group is actively investing in new areas - from cloud services to food delivery, from online education to smart devices. On the company's website, you can read the explanation of its CEO Boris Dobrodeev about this strategy, in which e-commerce is declared an important stage in the construction of a truly comprehensive ecosystem that allows you to create a fundamentally new relationship with the user.

Of course, there are doubts whether the company will be able to implement such a strategy together with Sberbank, and whether it will not turn into a source of inexpensive traffic for partners. We believe that due to its relatively small capitalization (RUB 360 bn), the company is now also an attractive acquisition target. The program of bonds of LLC Mail.Ru Finance with a volume of up to 100 billion rubles inclusive, registered by the Moscow Exchange, may also cause some concern. However, it is not expected that in the near future the loans will exceed 10 billion rubles.

The competencies of the major shareholders of the company lie in the field of e-commerce, online communications and Internet business in general, which makes it possible to predict the expected vector of Mail.Ru Group's development in the direction of strengthening integration with Internet commerce.

Our estimate of the fair value of Mail.Ru Group shares is RUB 3,121. The upside potential for the company's GDR value is currently + 82% to the current price of RUB 1,710. We expect the market price to reach this value by the end of the year and consider the current moment to be extremely attractive for the "Buy" of the company's global receipts.