Yelp Inc (NYSE:YELP) recently saw niche hedge fund Joho Capital buy up almost 900,000 shares per a 13G filing with the SEC. Joho now owns over 5.2% of the social network site. Robert Karr founded Joho Capital in 1996 and is one of Julian Robertson’s ‘tiger cubs’. Karr worked at Robertson’s Tiger Management for four years before starting his hedge fund. Joho employs a niche strategy that focuses on a select number of companies – owning only nine at the end of the third quarter.
Yelp is down 20% since its March IPO, but has showed strength of late, beating EPS estimates by at least 25% each of the last two quarters. The social review site trades at an incalculable trailing P/E and an outrageous forward P/E of 750x.
Yelp admits that its international markets are currently un-monetized and that they are under-converting in the U.S. The social platform is currently only generating revenue from 35,000 businesses, versus the over 27 million businesses that operate in the U.S. Magna Global suggests that the addressable market for local advertising is upwards of $65 billion in the U.S. alone, where only 6% is being spent online. Online spending is expected to grow rapidly over the next few years as digital advertising continues its takeover of print advertising.
A positive for the social review site is its strong mobile presence. Around 50% of all searches are being done via its mobile app and the majority of Yelp’s users are converted at a much higher rate on a monetization level in mobile versus desktop. Yelp is seeing its mobile app used across 8.2 million unique devices each month, and future growth in emerging markets should be driven by smartphone adoption. Although Yelp’s valuation may seem out of line, we believe its growth prospects and positioning present investors with a solid opportunity. Yelp’s five-year EPS growth rate is estimated to average 20% annually through 2017. Joho joins billionaire Ken Griffin in Yelp, who upped his stake over 50% during the third quarter (see Ken Griffin’s newest picks).
Joho’s tech-focused portfolio also includes the likes of Google Inc (NASDAQ:GOOG), Baidu.com, Inc. (NASDAQ:BIDU), Facebook Inc (NASDAQ:FB) and Zynga Inc (NASDAQ:ZNGA).
Google made up over 30% of Joho’s 13F portfolio last quarter and is its largest holding. Google has started to rebound from its third quarter earnings miss that drove the search stock down over 10%. The tech company still only trades at 15x forward earnings and 5x sales, the cheapest among Joho’s tech picks. We believe the tech company remains a solid investment opportunity despite the interim pressures it will face as a result of integrating newly-acquired Motorola Mobility. Jim Simons was one of the few big-name investors selling out on the Google weakness last quarter, dumping over 70% of his shares (check out Jim Simons’ top bets here).
Baidu.com is another search-focused holding of Joho’s, making up over 6% of the fund’s 13F. While at Tiger Management, Karr lived in Tokyo and had a specific focus on Asian equities, and so it is no surprise that he has at least one Asian company in his portfolio. This Chinese search company is only around a tenth the size of Google, but has the best expected growth of Joho’s tech companies at a 39% expected EPS CAGR. Baidu is quite the value play when you compare its PEG of 0.52 to Google’s 1.40. Interestingly, Ken Fisher, founder of Fisher Asset Management and long-time Forbes columnist, dumped over 60% of his stake last quarter (see Ken Fisher’s other intriguing picks).
Facebook Inc (NASDAQ:FB) shares are down 30% since the company’s IPO debacle in May. At a trailing P/E of 250x, the tech company looks to be quite rich, but its 40x forward P/E tells us that future growth is a bit cheaper at the moment. Given many investors’ concerns over mobile monetization, we would prefer to stay on the sidelines. If the social network can begin executing mobile better, it may well meet its expected EPS growth rate of 27% per year over the next half-decade. Multi-billionaire George Soros was a major supporter of Facebook last quarter (see George Soros’ newest picks).
The only stock that Joho sold off completely last quarter was Zynga Inc (NASDAQ:ZNGA). This tech company has had a much harder time since going public in comparison to other high profile IPOs like Facebook and Yelp. Zynga is down almost 75% since its December 2011 IPO, and continues to trade at a forward P/E of 175x. Zynga has been pressured given its over-reliance on Facebook, but it will become less linked with the social media giant beginning next spring, and it will also turn toward possible growth opportunities in overseas gambling. Steven Cohen, founder of SAC Capital, also dumped all of his shares during the third quarter (check out Steven Cohen’s key picks).
To recap: we believe that Joho is sticking to their philosophy of running a concentrated equity fund that focuses on high-profile, high-growth stocks. Yelp is Joho’s newest addition to an overweighed tech portfolio and provides the fund with a robust growth opportunity. Two of Joho’s stocks also made our list of top ten tech stocks loved by hedge funds (see our entire Top Ten here).
