Why Chinese Internet Stocks Climbed a Great Wall

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese online portals Changyou.com (Nasdaq: CYOU  ) , Youku (Nasdaq: YOKU  ) , and Sohu.com (Nasdaq: SOHU  ) all surged today after posting earnings. Changyou (and Sohu, to a lesser extent) trounced the Street’s expectations. Youku came along for the ride by posting slimmer losses than expected.

So what: Only Changyou beat both top and bottom lines. Its $147.3 million in reported revenue bested the Street’s $142.7 projections, and a hefty $1.29 in profit per share ($1.35 in non-GAAP terms) came in well ahead of analysts’ consensus forecast of $1.11 in EPS.

Changyou parent Sohu reported only $0.42 in adjusted EPS, which stumbled under the rather low bar set by a consensus EPS of $0.52 cents. Sohu did beat on the bottom line, with $255.7 million in revenue, besting the $249 million analysts had expected.

Youku managed a net loss of $0.09 cents per share, which was a bit better than the$0.12 per share that Wall Street expected the Chinese video site to lose. Revenue was in line with estimates.

The three stocks all broke above 10% gains. Changyou led the pack with a 19% pop, but Sohu was right on its heels, gaining 18% on heavy volume all day. Youku shareholders had to settle for a 10% increase, but it’s still the most valuable of the trio by market cap.

Now what: The trio of pops has temporarily arrested a yearlong slide in the price of these Chinese stocks. Youku’s lost 30%, and both Changyou and Sohu have shed 40% of their value over the last 52 weeks, even after today’s gain. Both Changyou and Sohu are arguably quite cheap.  Sohu’s P/E is now just under 12, and Changyou’s is less than half of that. Yoku, still unprofitable, might start posting positive earnings sooner rather than later.

Much of your reaction will probably hinge on how much you trust Chinese companies and their auditors. A string of highly-publicized fraud claims has battered much of the industry, leaving the stocks that still seem on the up-and-up to trade at significant discounts. If market confidence returns, there could be better gains ahead, particularly for Changyou, which has had the steadiest bottom-line growth of the trio.

Want more news and updates? Add these Chinese Internet stocks to your Watchlist.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. Motley Fool newsletter services have recommended buying shares of Sohu.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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