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Why Inc. Stock Fell Wednesday

By Daniel Sparks – Apr 25, 2018 at 1:06PM

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Though Sohu's revenue growth is looking good, its profitability is disappointing.

What happened

Shares of Chinese internet company (SOHU 3.42%) fell as much as 11.8% on Wednesday, following the company's first-quarter earnings release. The stock is down 8.4% at the time of this writing.

Bearishness toward the stock on Wednesday likely reflects's wider-than-expected non-GAAP loss per share. In addition, Sohu's outlook for its second-quarter non-GAAP loss per share is worse than the consensus estimate for the period. 

A chalkboard sketch of a stock price falling

Image source: Getty Images.

So what

Driven by strong performance from Sohu's search and online gaming business, Sohu's top-line growth was better than both management and analysts were expecting, coming in at $455 million -- up 22% year over year. On average, analysts were expecting revenue of $425 million.

On a non-GAAP basis, Sohu lost $2.50 per share -- worse than its loss per share of $1.75 in the year-ago quarter and wider than a consensus analyst estimate for a loss per share of $1.56.

Sohu's worse-than-expected profitability was driven primarily by traffic-acquisition costs for Sohu's search business, which grew faster than revenue on a year-over-year basis. This meant Sohu's GAAP and non-GAAP gross margins for its search and search-related advertising business fell from 42% in the year-ago quarter to 34% in the first quarter of 2018.

Now what

Looking ahead to the "coming quarters," management believes its ongoing efforts to streamline its organization and significantly reduce video content costs will help improve its bottom-line results. For its second-quarter, management expects revenue between $485 million and $510 million. It forecast non-GAAP EPS to be between a loss of $1.40 and a loss of $1.65. On average, analysts were expecting a second-quarter loss per share of $1.32.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool recommends The Motley Fool has a disclosure policy.

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