Can Sohu Earnings Keep the Stock Soaring?

Sohu.com (SOHU 2.13%) will release its quarterly report on Monday, and judging from the stock's recent ascent to new multiyear highs, investors expect a lot from the Chinese Internet company. But with the company facing some strong competition, it's not a given that Sohu earnings will provide the growth that shareholders would like to see.

Sohu has a suite of Internet businesses under its corporate umbrella, with the company providing search, gaming, browser, and other common services along with video content. Yet despite its wide array of exposure to the growing Chinese Internet space, Sohu also has to deal with both established giants and up-and-coming challengers that pose competitive threats to its business. Let's take an early look at what's been happening with Sohu over the past quarter and what we're likely to see in its report.

Stats on Sohu

Source: Yahoo! Finance.

Can Sohu earnings keep up with the stock?
Analysts have cut back on their views on Sohu earnings in recent months, cutting $0.12 per share from their June-quarter estimates and about the same amount from their full-year 2013 consensus figures. Yet the stock has still managed to post sharp gains, advancing nearly 40% since late April.

Sohu carried a lot of momentum into the second quarter, with its first-quarter results coming in better than expected. The company saw revenue rise 36% with a 13% gain in net income, with particular strength in its online video segment, which doubled its sales. Although the first quarter is typically the weak season for Sohu, year-over-year gains in advertising revenue and search revenue were also impressive, and the only weak spot was guidance for the June quarter for earnings to fall below analysts' previous expectations.

The problem that Sohu has is that it is a perennial also-ran in just about all of the industries in which it has a presence. Baidu (BIDU -1.78%) has crushed it and the rest of its competition in the search space, and Baidu's healthy earnings report earlier this week only underscored its competitive strength. Youku Tudou (NYSE: YOKU) leads in video, and SINA has an edge in the online-portal space. Yet what Sohu offers is diversification as well as a healthy cash balance and a freshly returned CEO in Charles Zhang, whom investors hope will pull the company back into contention.

One interesting exit strategy for Sohu might come from selling parts of its business. For instance, given the emerging competition in search between Baidu and upstart Qihoo 360 (QIHU.DL), speculation has arisen that Sohu's Sogou search business might become a target for one or more of the other players in the space. For instance, for Qihoo, buying Sohu's search unit would boost its share of the market to nearly 20%, enhancing its competitive threat against Baidu.

In the Sohu earnings report, watch for the company's CEO to express his new vision now that he's back from a year on sabbatical. So far, it appears that Sohu wants to use all of its properties to create an integrated high-quality experience, but whether that will pay off in the face of a heightened competitive environment is far from a certainty.

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