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Why Stock Was Falling Today

By Jeremy Bowman – Aug 10, 2020 at 1:36PM

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Disappointing guidance helped sink the Chinese tech stock.

What happened

Shares of (SOHU 3.80%), a Chinese media, search, and gaming company, were sliding Monday after it posted a disappointing second-quarter earnings report and management offered weak guidance for the third quarter.

As of 1:30 p.m. EDT, the stock was down 16%.

A street scene in China

Image source: Getty Images.

So what

Sohu's revenue fell 9% in Q2 to $421 million, missing analysts' consensus estimate of $433.4 million as the COVID-19 pandemic continued to impact the company, especially in areas like advertising, which provides most of its income. Revenue from search advertising declined 13% to $241 million, and brand advertising revenue fell by a similar percentage. Online gaming sales were up slightly year over year, though they declined from the first quarter as more people in China returned to work. As revenues fell, Sohu also pulled back on its marketing spending, and the company managed to turn an adjusted profit of $0.28 a share, well ahead of analysts' average prediction of a $0.04 a share loss.

During the quarter, Sohu completed its acquisition of the Changyou gaming business and after the quarter's end, it announced the sale of its Sogou search engine to Tencent. The two moves together will significantly alter its business.

"During the quarter, we integrated our Media Portal's brand advantage and influence with Sohu Video's advanced broadcast technologies," said CEO Charles Zhang. "These initiatives allowed us to more effectively generate and distribute our high-quality original content, and further enhanced our credibility by reflecting the attitude and values of Sohu."

Now what

Investors seemed most disappointed with the Chinese tech company's third-quarter guidance, which calls for another decline in revenues and a loss on the bottom line. Management projects a decline in its brand advertising business of 9% to 20% and a similar drop in online gaming of 12% to 21%. On the bottom line, excluding the Sogou sale, it expects an adjusted loss of $10 million to $20 million.

Considering that the analyst consensus called for a revenue increase of 1% and profits of $0.23 per share, it's not surprising to see the stock price falling Monday.

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

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