Can Anything End Sohu.com's Slide?

Shares of Sohu.com (Nasdaq: SOHU  ) hit a 52-week low on Friday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
Quick! Grab your rabbit's foot, your four-leaf clovers, and any other lucky paraphernalia you own if you're a Sohu.com shareholder, because you're going to need it to get this stock out of the doghouse.

Sohu.com, a provider of online gaming, search, media, and mobile services in China, has dealt with a myriad of challenges lately. China's slowing GDP growth has put pressure on many China-based stocks. Sohu.com relies on advertising for a good portion of its sales, which presents a problem if Chinese companies hold back on ad spending due to order slowdowns. Also, Sohu.com has invested a lot of money into online gaming recently (its 17173.com portal), which hasn't returned nearly what the company had hoped. Finally, online gaming company Changyou.com (Nasdaq: CYOU  ) , which is majority-owned by Sohu, has failed to pass along sizable price increases to the small base of users currently paying for its service.

However, there are still plenty of reasons to be excited about Sohu's long-term prospects. The company's Sogou.com search engine has demonstrated strong growth and represents a viable threat to take market share from SINA (Nasdaq: SINA  ) and Baidu (Nasdaq: BIDU  ) , which also operate in the search space in China. Sohu's online streaming and mobile platforms also provide the company with quick growth avenues as long as spending remains robust. With China's citizens becoming more exposed to technology and some beginning to receive higher levels of pay, the market remains largely untapped.

How it stacks up
Let's see how Sohu.com stacks up next to its peers.

SOHU Chart

SOHU data by YCharts

Baidu has absolutely crushed its peers in terms of appreciation with online gaming specialist Perfect World (Nasdaq: PWRD  ) lagging badly.

Company

Price/Book

Price/Cash Flow

Forward P/E

Cash / Debt

Sohu.com 1.5 4.3 8.9 $871 million / $0
SINA 3.4 55 60.6 $648 million / $2 million
Baidu 15 31.6 19 $2.53 billion / $396 million
Perfect World 0.8 2.6 2.7 $332 million / $182 million

Sources: Morningstar, Yahoo! Finance.

One thing apparent from the metrics above is that gaming-focused companies or gaming divisions have been the primary culprit of weakness in recent quarters. Higher development costs, lower paying-customer growth, and weak rises in the average revenue extracted from existing users has made the gaming industry a veritable wasteland. It's the reason Perfect World's results have been all over the place, and why SINA's and Sohu's margins have reversed course.

Another standout from these metrics is just how well capitalized these Chinese media and entertainment companies are. Baidu boasts more than $2.1 billion in net cash, SINA has nearly no debt, and just over half of Sohu.com's market value is derived from its cash on hand.

Whereas Perfect World is very segmented, operating in just the gaming side of the industry, the remaining three have something unique to offer investors. Baidu has the lion's share of the search market in China. The growth opportunities are huge, but its lofty valuation has left me and longtime Fool contributor Rick Munarriz on opposite ends of the spectrum when it comes to where it should be trading.

SINA's Weibo.com, a hybrid of Facebook and Twitter, could offer Facebook a gateway into China and looks like a possible takeover or partnership candidate. Outside of that, its deteriorating cash flow is downright scary.

Sohu's Sogou.com search engine offers tremendous potential, but at just 10% of total sales, doesn't give the company enough of a boost just yet to put it among the elite search engines in China.

What's next
Now for the $64,000 question: What's next for Sohu.com? The answer is going to depend on whether it can continue to penetrate China's search market, whether it can grow its mobile services businesses, and what it plans to do with its large amount of cash on hand.

Our very own CAPS community gives the company a three-star rating (out of five), with 93.1% of members who've rated it expecting it to outperform. Count me among the majority, as my CAPScall is currently down a humbling 40 points.

Don't feel sorry for me, however, because I have no intention of closing the pick. Despite weaker margins, I see plenty of avenues of growth for Sohu. As I mentioned, Sogou should be a key value driver as it did demonstrate 171% sales growth in the latest quarter. I also feel that the company's wireless business could drive stable double-digit growth for years to come. Unfortunately, these two segments only accounted for $35 million of Sohu's $227 million in sales last quarter, with online gaming revenue making up slightly more than half of its sales. Still, with good long-term growth prospects and a boatload of cash, I see Sohu heading much higher.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Baidu and Facebook. Motley Fool newsletter services have recommended buying shares of Sohu.com, SINA, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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