According to Forbes, Stephen Mandel, Jr. is among the world's 1,000 richest individuals, with a total net worth of roughly $2.1 billion. Much of that wealth came from founding, and running, his $23 billion hedge fund: Lone Pine Capital.
Stephen Mandel of Lone Pine Capital. Source: Wikimedia Commons.
Though we like to tease the results of hedge funds -- and Wall Street figures in general -- here at the Fool, it's also worth investigating huge investments made by some of the world's largest funds. Though we shouldn't blindly follow these funds, they can be a great source for ideas.
Along that vein, let's investigate why Mandel's fund has accumulated a huge position in Baidu Inc (ADR) (BIDU +4.29%), parent company of China's largest search engine.
Building a position over time
Last quarter's foray into shares of Baidu wasn't a first for Lone Pine. The hedge fund has been building a position in the Chinese behemoth for three quarters in a row now. Here's what the purchases looked like, based on share price at the end of each quarter.
|
Quarter |
Total Shares |
Price per Share |
Total Price Paid |
Current Market Value |
|---|---|---|---|---|
|
Q3 2013 |
5.3 million |
$155.18 |
$821 million |
$873 million |
|
Q4 2013 |
104,000 |
$177.88 |
$18 million |
$17 million |
|
Q1 2013 |
2.4 million |
$152.27 |
$368 million |
$399 million |
|
Total |
7.8 million |
$154.49 |
$1.2 billion |
$1.3 billion |
Source: Whale Wisdom.
Beyond these numbers, the most important thing for investors to ponder is: Why would a hedge fund amass such a big position -- now over 5% of all of its holdings?
To that, I have three possible answers.
Baidu has shown that it can flex its financial muscles
One of the big reasons shares of Baidu have been held back over the past two years is because of the surprising performance of upstart Qihoo 360 (QIHU +0.00%). Originally, Qihoo was focused on putting out an Internet browser with enhanced security functions. In 2012, however, the company decided to strike out on its own in the search game, making its own search page the default for its ubiquitous browser.
The move worked better than most expected, and over a very short time, Qihoo has been able to capture a fairly large portion of the Chinese search market. Depending on who's numbers you trust, Qihoo had up to a 22% share of China's search market -- which has cut in significantly to Baidu's dominance. What once was an 80% share could now be as low as 62%.
But Baidu has one thing that really helps separate it from Qihoo when investors look toward the future: cash, and lots of it. While Baidu currently has $6.4 billion in cash, Qihoo clocks in with only $1 billion. That's a big difference, and Baidu showed what a huge advantage it was last July when it acquired 91Wireless for $1.9 billion. The move gave Baidu the largest apps platform in China. Not coincidentally, shares surged over 35% in the two weeks that followed.
Forgoing profits now to dominate mobile in the future
As is the case in America, the average Chinese Internet user is transitioning to a mobile usage. That means Baidu needs to meet that shift by optimizing its advertising on mobile devices. The strategy seems to be working, as revenue for the company has boomed over the last 12 months.
Though the company doesn't break out specific revenue from its mobile services, comments by management show the company has made amazing strides in this realm between just the second quarter of 2013 and the end of the year.
Source: SEC filings. Numbers in millions.
But growth like this doesn't necessarily come cheap. The acquisition of 91Wireless undoubtedly played a role, here, and there will probably be further acquisitions in the future.
In the end, what that means is that even though revenue grew by 47% in 2013, net income expanded at a slower rate of 35%. In the long term, those aren't great trends. But Baidu realizes that now is the time to invest in the future of mobile and that outsized profits in the future will be the company's reward.
And demographics to boot
But possibly the biggest reason Lone Pine could be interested in China is the amazing size of both its current Internet-user base and the potential for that base to grow. Compared to just about every other industrialized country in the world, no one comes close to China.
Source: SEC filings, numbers in millions.
If Lone Pine and Stephen Mandel are so high on Baidu, maybe it's at least worth looking into for your own portfolio.
