Sohu Wins With Games

The Olympics are over, but Sohu.com (Nasdaq: SOHU  ) is still racing for the finish line.

The Internet portal came through with another blowout quarter yesterday, but it wasn't the company's role as the official online reporter for August's games that earned Sohu its gold medal. Sohu's online gaming division, anchored by the booming popularity of its Tian Long Ba Bu multiplayer fantasy game, saw revenue soar 330% to $54.6 million. That is less than half what analysts expect out of online gaming leaders NetEase.com (Nasdaq: NTES  ) and Shanda Interactive (Nasdaq: SNDA  ) next month. But it's more than the $51.1 million that Sohu rang up in ad revenue during the period.

The end result is pure gold. Overall revenue skyrocketed 134% to $120.7 million. Net income rose 316% to $1.02 a share. Analysts were looking for earnings of only $0.95 a share on $114.7 million in revenue, but what else is new? Sohu has made mincemeat of Wall Street's profit targets.  

 

EPS Est.

EPS Actual

% Difference

Q2 2007

$0.13

$0.15

15%

Q3 2007

$0.21

$0.25

19%

Q4 2007

$0.31

$0.39

26%

Q1 2008

$0.37

$0.55

49%

Q2 2008

$0.67

$1.02

52%

Q3 2008

$0.95

$1.02

 7%

Sure, the most recent numbers are a small win relative to past quarterly victory laps, but it'll do at a time when stateside stocks are making investors nervous. Sohu takes the baton handed by search engine leader Baidu.com (Nasdaq: BIDU  ) -- with its own market-thumping report last week -- and runs with it.

Then again, given Sohu's surging attraction to Internet cafe diehard gamers, maybe it's better to compare Sohu to the dirt cheap valuations in online gaming.

Sohu expects to earn between $1.13 a share and $1.19 a share this quarter, pricing the stock at a mere 11 times this year's earnings. That seems ridiculously cheap, but it's actually a higher multiple than the single-digit ransoms that companies like Giant Interactive (NYSE: GA  ) , Perfect World (Nasdaq: PWRD  ) , and The9 (Nasdaq: NCTY  ) are fetching.

If only speedy growth stocks at rock-bottom valuations could compete in an Olympic event. They don't. It's not a game. Fortunately for investors, it's better: It's an opportunity.

Other Olympian-style games to play in China:

NetEase, Baidu.com, and Shanda have been recommended to subscribers to the Motley Fool Rule Breakers newsletter service. If you carry a torch for stocks worthy of winning the gold, look into the service with a free 30-day, all-access pass.

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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