To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk versus reward potential of the company you're following. I propose we take a closer look at the good and the bad at Sohu.com
Sohu owns and operates China's fourth-most-popular search engine, Sogou.com, and owns a majority stake in Changyou.com
Sohu once again hurdled analyst estimates in the third quarter on the back of sharply higher search revenues, strong advertising, and solid online gaming growth. At the heart of Sohu's stock gains are consistently rising gross margins, which have seen an uptick from 64% to 76% during the past four years. These margins have translated into multiple earnings beats in that time and have allowed Sohu to free itself of any debt while building up a very healthy pile of cash -- currently more than $16 per share. With Google
No stock is perfect, and for Sohu, most worries stem from its particularly high short interest, which currently sits at 10.3%. Short shares are no guarantee of a drop in the making, but high concentrations of short shares are a clue that a company could be overvalued. In Sohu's case, it is trading over two times its price earnings to growth ratio and well over three times book value. Sohu may have double-digit growth, but investors are paying a premium for it.
It also wouldn't hurt if insiders would give shareholders tangible evidence of their own bullishness. Sohu insiders have not acquired any shares since January 2010 and have logged 12 separate sells since late May.
What investing in Sohu comes down to is exactly how much you're willing to pay for a chance to be a part of the company's growth story. Make no mistake about it, Sohu is not a cheap stock, but given its unique array of revenue streams coupled with its debt-free, yet cash-rich balance sheet, I believe that as long as margins remain above 70% and the company doesn't lose focus on Sogou.com, this should remain a solid long-term buy.
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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. Despite being an avid shorter, he's actually quite tall. You can follow him on CAPS under the screen name TMFUltraLong. Baidu, Google, and Sohu.com are Motley Fool Rule Breakers recommendations. SINA is a Motley Fool Stock Advisor pick. Google is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.