Sohu.com (NASDAQ:SOHU) posted another market-thumping quarter yesterday, but it wasn't enough. Shareholders suffered a 7% hit, after the company's majority-owned Changyou (NASDAQ:CYOU) bumped the release of a pair of Web-based games to next year.
The delays rained on what would otherwise have been applause-worthy results. Revenue climbed 25% year over year to $127.1 million, powered by strength in online gaming. Earnings of $0.79 a share were lower than a year earlier, but well ahead of Wall Street's $0.72-a-share profit target. Sohu has topped bottom-line estimates in each of the past nine quarters.
Video game release dates get pushed back often. They seem to have less dire consequences in cyberspace, where the shelf life is remarkably long. Chinese pioneer NetEase.com (NASDAQ:NTES) has released several sequels to its flagship Fantasy Westward Journey massive multiplayer role-playing game, and it remains its most popular title.
Sohu better hope that's the case, because online gaming is the real growth driver these days. Online gaming revenue soared 39% during the quarter, well ahead of the mere 5% top-line increase in its brand advertising stronghold.
A 5% increase in online advertising revenue pales when compared to the 37% year-over-year spike that Baidu (NASDAQ:BIDU) posted last week. The difference here is that Baidu specializes in the lucrative paid search niche as China's leading search engine. Sohu's portal consists mostly of brand-fortifying display ads.
With online gaming growing to make up the majority of Sohu's revenue, it's easy to understand why nervous investors would shoot down shares of Sohu and its springtime Changyou spinoff. When the pipeline is clogged, it can be problematic.
The market still overreacted yesterday. Changyou is growing just fine with its current slate of games. This isn't The9 (NASDAQ:NCTY), which naturally got slammed when Activision Blizzard (NASDAQ:ATVI) decided to hand over its World of Warcraft license in China to NetEase, instead.
Both Sohu and Changyou are trading at P/E multiples in the low teens. These are great prices for misunderstood growth stocks in a country that is growing quickly.
Other games to play in China:
Start investing today – just $7 per trade with Scottrade. Or find the broker that's right for you.
