Please ensure Javascript is enabled for purposes of website accessibility Hits 10-Year Low After Rough First Quarter

By Rick Munarriz – Apr 25, 2018 at 1:10PM

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The Chinese dot-com pioneer trades at its lowest level since the summer of 2007 after another disappointing financial report.

The market isn't warming up to's (SOHU 3.42%) latest financial report. Its shares are hitting their lowest levels since the summer of 2007 after the Chinese online advertising, search, and gaming specialist posted disappointing first-quarter results on Wednesday morning. 

Revenue for the quarter is clocking in at $455 million, 21.6% ahead of where it was during the prior year's depressed first-quarter results. Sohu has now rattled off four consecutive quarters of double-digit percentage growth after snapping a streak of six straight periods of top-line declines. 

Continuing its turnaround may seem to be an applause-worthy event. This is the third quarter in a row that year-over-year revenue growth tops 20%. However, weak guidance and continuing softness in its flagship display advertising business are sending the stock that was hitting two-year highs just six months ago to fresh 10-year lows. Spun-off subsidiaries Sogou (SOGO) and (CYOU) are also moving lower on Wednesday. 

Sohu logo.

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The lost decade

Sohu's top-line growth was the handiwork of a 55% surge in Sogou-led search ad revenue and a 24% uptick in the Changyou-fueled online game revenue. Those gains were held back by a 31% slide in brand advertising revenue, but at just $56 million, it has become the smallest segment of Sohu's business. Search and search related ad revenue of $220 million accounted for nearly half of the revenue. 

Sohu was targeting $410 million to $435 million in revenue for the quarter just three months ago. It landed at the low end of its brand advertising guidance, but topped its forecast for online game revenue and Sogou. Last summer's spin off of Sogou -- along with taking Changyou public years earlier -- gives investors ways to invest directly in Sohu's faster growing components, but it still benefits from majority stakes in both enterprises. 

The losses continue at Sohu, but that was expected. Sohu has posted just one profitable quarter over the past four years. However, the losses are widening. The $2.39 per share loss for the quarter and the $2.50 per share adjusted loss for the quarter were worse than Sohu was modeling back in January. 

Guidance for the new quarter is uninspiring. Sohu sees $485 million to $510 million in revenue, up just 5% to 11% since the prior year's second-quarter showing. Comparisons were going to get harder once we started lapping the first of the four past quarters of double-digit growth. Sohu sees brand advertising revenue declining 19% to 24%, Sogou revenue rising 40% to 45%, and online game revenue sliding 22% to 31%. Sohu is also bracing investors for another quarterly deficit. It sees a per-share loss of $1.44 to $1.70 or $1.40 to $1.65 on an adjusted basis.  

The stock moving lower in response to the report reveals the market's reaction. Sohu may have topped its guidance for revenue in the first quarter, but a larger than expected loss and guidance suggesting its third straight quarter of decelerating revenue growth isn't enough to impress investors. 

Rick Munarriz owns shares of Sogou Inc. The Motley Fool recommends The Motley Fool has a disclosure policy.

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