Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
U.S. stocks didn't move much today on the whole, with the S&P 500 rising modestly to yet another all-time record high but with other major benchmarks easing downward. Yet in the Chinese Internet space today, investors saw a sea of red ink, with Changyou.com (NASDAQ: CYOU ) , Sohu.com (NASDAQ: SOHU ) , and E-Commerce China Dangdang (NYSE: DANG ) all posting big declines. Let's take a closer look at why some of China's most promising Internet plays dropped so hard today.
Sohu and Changyou both owed their declines to weaker than expected guidance, with Sohu dropping 16% and Changyou losing more than 20% of its value. Sohu's third-quarter results were mixed, with the Internet company actually beating revenue estimates but still posting a drop in adjusted net income. Moreover, Sohu said that it expects to lose money even on an adjusted basis in the current quarter, seeing declines in advertising revenue that could challenge its long-term growth story if they persist.
Meanwhile, Changyou, in which Sohu holds a majority stake, set a record for total revenue during the third quarter, but adjusted net income was down 4% from the year-ago quarter. Changyou also said it would expand its portfolio of games, betting heavily on the hope that new offerings will bring visitors back to its gaming site. Yet paying to create those offerings involves substantial upfront costs, with no guarantees that Changyou will be able to recover its initial expenditures.
Dangdang's 7% drop comes on the heels of a 16% decline last week. Dangdang's warning last week that it wouldn't be able to meet its previous guidance for revenue started the slide, but Sohu and Changyou's results only heightened the awareness of the risk level involved in the Chinese Internet space. In the long run, the survivors of China's Internet industry should bring solid gains for investors, but just as there was in the U.S. at the turn of the millennium, China can expect to see many companies fail to live up to their promise as the industry evolves.
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