What happened

Shares of Sogou (NYSE:SOGO) plunged 19.4% lower in July of 2018, according to data from S&P Global Market Intelligence. The Chinese online search specialist was doing alright until the very end of the month, where a mixed earnings report sent share prices tumbling.

So what

In a second-quarter report that CEO Xiaochuan Wang characterized as "solid," Sogou beat Wall Street's bottom-line targets but fell short of analysts' revenue estimates. Revenue rose 43% year over year to $301 million, led by 45% stronger search-related sales. Earnings rose from $0.07 to $0.09 per American depositary share. The analyst consensus had called for earnings near $0.07 per share on revenue of approximately $305 million.

Two young Chinese women share information on a smartphone.

Image source: Getty Images.

Now what

Sogou's shares are prone to big swings for a couple of simple reasons.

  • As a Chinese business, many American investors don't feel connected to Sogou's business and might not have access to some important sources of information about this company and its stock.
  • Though Sogou has been around for nearly a decade now, it only entered the public markets in November of 2017. It's a new ticker, untested on the market, and not always easily understood through year-over-year or longer-term analyses.
  • At the IPO, Chinese internet giants Tencent (NASDAQOTH:TCEHY) and Sohu.com (NASDAQ:SOHU) combined for a total ownership of 82% of Sogu's business. Those stakes later declined to 71%, but Sohu and Tencent remain Sogou's largest shareholders, with 96% of the voting power in shareholder elections and votes. Regular investors hold a very small stake in Sogou, which tends to boost the stock's volatility.

Moreover, Chinese regulators launched an investigation of Sogou in June, forcing the company to shut down parts of its online advertising operations for 10 days in early July. The company is accused of showing video ads that insulted a national hero. That blackout will reduce Sogou's third-quarter revenues by a significant but unannounced amount.

All of that being said, Sogou is growing at an impressive pace while trading at just 19 times forward earnings. If you don't mind the volatility boosters listed above, this could be a good time to start a position in this high-growth stock.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool recommends Sohu.com. The Motley Fool has a disclosure policy.