High-growth stocks: One of the biggest moves in the hedge fund world this week was Stephen Mandel’s decision to buy a massive stake in Pandora Media Inc (NYSE:P). Mandel’s Lone Pine Capital disclosed that it now owns 5.3% of the Internet radio company’s outstanding stock worth a total of $269.7 million.
Judging by Lone Pine’s last 13F filing (see the details here), Pandora is now a top 30 position in the hedge fund’s equity portfolio. The recent SEC filing was passive—not activist—in nature, so it seems fairly clear that Mandel and Lone Pine are buying for the growth potential.
Up 188% year-to-date, Pandora’s stock price doesn’t exactly scream value, and most of its multiples trade at levels above industry averages. Booming investor sentiment has driven much of this appreciation; Pandora has beaten Wall Street’s earnings forecasts in four of its past five quarters and its latest results doubled up on consensus estimates (4-cent EPS vs. 2-cent consensus).
Behind this growth has been a new advertising strategy, in which Pandora has: (1) decreased the length of time between standard in-playlist ads, (2) honed the effectiveness of its video ads, and (3) appointed former advertising industry executive Brian McAndrews as its new CEO. The company’s mobile revenues also nearly doubled last quarter (yoy), and it now represents almost three-quarters of all sales. One year ago, mobile revenues made up just 57% of Pandora’s total top line.
At a time when Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) have introduced competitive radio services, it appears that Stephen Mandel is betting on Pandora’s ability to continue earnings expansion into the future. If it can maintain its current growth trajectory, Pandora provides even more upside over the next 12 to 18 months. Ken Griffin’s Citadel and Bain Capital’s hedge fund were both upping their stakes significantly last quarter, so their moves in Pandora are worth watching as well.
Some other Mandel growth favorites
Aside from his recent move into Pandora, some other growth stocks that Mandel and Lone Pine like are Priceline.com Inc (NASDAQ:PCLN), Google and eBay Inc (NASDAQ:EBAY). Regarding the latter, it’s interesting to note that the hedge fund manager does hold any shares of Amazon.com, Inc. (NASDAQ:AMZN), so it’s clear which e-commerce giant he prefers of the two.
With historic annual earnings growth of over 50% during the last half-decade, eBay is a classic growth stock that currently trades at a fairly attractive value. Shares sport a forward earnings multiple near 17 and a PEG under 2.0, and while growth is maturing, sell-side analysts still predict 17% to 18% EPS expansion in 2014. Unlike Pandora, eBay hasn’t exactly experienced booming returns this year, but it has beaten consensus earnings in four of its past five quarters.
Priceline, meanwhile, is the largest holding in Lone Pine’s equity portfolio. The hedge fund has over $1.4 billion invested in this travel stock, significantly above other bulls like Philippe Laffont’s Coatue Management and Tiger Global. In a travel industry that captures a lot of investors’ attention, Priceline offers the best growth potential—double that of peers like Expedia Inc (NASDAQ:EXPE) and Orbitz Worldwide, Inc. (NYSE:OWW)—and international hotel booking will play a big part of this going forward. Credit Suisse holds an “Outperform” rating on the stock with a whopping target price of $1,200, while Stifel and Deutsche Bank share a nearly identical sentiment.
Lastly, Google is a top three pick for Mandel. The tech giant was hedge funds’ favorite stock pick last quarter, and it dethroned Apple for the No. 1 spot. In the same light as the aforementioned companies, Google offers a similar mix of growth without overvaluation. Google Glass is expected to improve the company’s sales footprint by 1% to 2% next year, and Android continues to dominate smartphone platform market share.
We’ll continue to watch Stephen Mandel and Lone Pine’s Pandora position, as well as the rest of their high-growth stock picks.
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