Baron Asset Fund recently published its first-quarter commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Baron Asset Fund returned -16.63% (institutional shares). In comparison, the benchmark S&P 500 Index was down 19.60%, while the Russell Midcap Growth Index was down 20.04%.
In the said letter, Baron Asset Fund highlighted a few stocks and GDS Holdings Ltd (NASDAQ:GDS) is one of them. GDS Holdings develops and operates data centers in China. Year-to-date, GDS stock gained 19.7% and on May 5th it had a closing price of $58.60. Its market cap is of $9.38 billion. Here is what Baron Asset Fund said:
“In the most recent quarter, we acquired shares of GDS Holdings Limited, the leading data center developer and operator in China serving the premier Chinese cloud service, e-commerce, social media/gaming, and internet players. Although we have not invested in many foreign-based companies, we believe that GDS represents a compelling opportunity. Its business shares many similarities with Equinix, Inc., a U.S.- based data center operator that has been a profitable long-term investment for the Fund. In addition, our real estate research team has met extensively with GDS management over the course of the last few years and has built increased confidence in the team’s growth aspirations and its ability to successfully execute them.
We believe that the Chinese data center industry remains in the earlier stages of its growth curve, and we believe it will experience one of the fastest multi-year growth rates globally as the Chinese government continues to support the rapid rollout of 5G connectivity. GDS’s current and future data centers support the critical IT infrastructure that empowers cloud adoption and enables numerous consumer and business applications. In addition to experiencing robust organic growth, GDS has accelerated its growth runway through select M&A. These acquisitions have allowed the company to obtain additional capacity in supply constrained markets at attractive prices. In addition, GDS has supplemented its dense urban strategy with a “campus strategy,” whereby it secures additional supplies of land and power on the outskirts of cities with minimal capital committed.
To provide some perspective on GDS’s growth rate, it signs more “bookings” in a single quarter than many global data center companies sign over the course of a year. Lastly, after two well received capital raises in 2019, GDS remains well funded with ample cash on its balance sheet to support multiple years of accelerated growth. GDS also has several deep-pocketed backers, including the Singaporean government’s investment fund, that have remained supportive of GDS’s growth plans and have participated in several of GDS’s capital raises. We believe there are many similarities to our other data center investments–GDS is earlier on its growth curve but growing at a much faster clip. We see a path for GDS to nearly triple its cash flow over the next few years, and we see a path to double our investment over that timeframe.”
In Q3 2019, the number of bullish hedge fund positions on GDS stock increased by about 7% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
