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).
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).