Soaring High in China

Shares of Sohu.com (Nasdaq: SOHU  ) popped 14% higher yesterday, after the Chinese dot-com delivered better-than-expected third-quarter results.

Revenue soared 20% to $164.1 million, with adjusted earnings clocking in at $1.16 a share. Analysts were banking on a non-GAAP profit of $0.90 a share on $156.8 million in revenue.

There was a 22% uptick in its flagship online brand advertising business. Sohu's online gaming arm -- the result of its majority stake in Changyou (Nasdaq: CYOU  ) -- rose a hearty 25% over last year's showing.

Sohu's biggest push came from its 134% surge in search advertising, but check your euphoria at the door. Sohu's Sogou engine is still a bit-part player in this market. Yes, that's a healthier year-over-year gain than market Chinese leader Baidu (Nasdaq: BIDU  ) , but we're also just talking about $5.4 million in revenue. This is just a 3% slice of Sohu's total revenue for the quarter -- and less than 2% of Baidu's quarterly revenue.

Now, a strong report isn't enough to propel a stock higher these days. Sohu's stock has nearly doubled since bottoming out this summer, so one can argue that a strong quarter was already discounted by Mr. Market.

Well, Sohu's guidance for the current quarter -- calling for non-GAAP net income between $1.10 and $1.15 a share -- is also well ahead of where Wall Street was perched.

Changyou is the first of the major online gaming companies in China to report this quarter. Sohu's strong performance there, along with its outlook for another sequential top-line gain, bode well for Shanda Games (Nasdaq: GAME  ) , Perfect World (Nasdaq: PWRD  ) , Giant Interactive (NYSE: GA  ) , and even Activision Blizzard's (Nasdaq: ATVI  ) efforts in licensing World of Warcraft in the world's most populous market.

Baidu rocked last week, but it's always been a speedster. Yesterday's strong Sohu report, on the other hand, should inspire investors in China's slower, smaller, and more finicky dot-com players.

Are you buying Chinese dot-coms these days? Share your thoughts in the comment box below.

Baidu, Perfect World, and Sohu.com are Motley Fool Rule Breakers selections. Activision Blizzard is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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