Today, let's look at three things investors should be watching regarding Sohu.com, as they will provide us better insight into the company
1. Sohu's ownership in Changyou
The first thing any Sohu shareholder needs to understand is the company's relationship with online gaming company Changyou.com
Changyou recently got back in the good graces of investors by paying out a very large special dividend; however, it merely masked the fact that growth has been tapering with the multiplayer online gaming provider. Changyou's customer base is huge, 199.5 million users to be exact, but it's had a very hard time monetizing the vast majority of those customers as it counted just 2.61 million of those 199.5 million as paying customers last quarter -- a 16% decrease from the previous year. This echoed the weakness we witnessed in Perfect World's
What needs to be understood here is that Changyou is undergoing a transformation via the 17173.com portal. The plan is to have Changyou's MMO games become available on 17173.com while also stepping up its presence in mobile gaming. What investors need to do is keep their eyes on Changyou's paying customers (i.e., are they growing?) and on how well Changyou can transition its platform over to mobile.
2. Sogou.com and the search wars
Perhaps the area of growth that offers the greatest promise for Sohu is in the search engine market. Its Sogou.com portal witnessed growth of 111% year over year, but currently only makes up about 11% of Sohu's total revenue. This is without question Sohu's highest-growth segment, but it's also a very competitive space.
In China, Baidu
3. Cash and the potential for a dividend
If you haven't really noticed it before, Sohu.com has a lot of cash! According to analysts at JPMorgan Chase, after Sohu receives its fair share of the Changyou.com special dividend, it should have about $640 million in cash with no debt. That type of cash is going to be crucial to fueling its expansion, for hiring top-notch technology talent for its Sogou search engine, and for being the catalyst that spurs a regular dividend.
Up until now Sohu has been quite adamant that it has no intentions of paying a dividend anytime soon (and you can't blame it, considering what little market share it actually occupies in the search market). However, that cash balance, which amounts to around $16.50, can act as a dangling carrot for a company looking to make an acquisition. At a market value of just $1.5 billion, a buyout is not out of the question, nor is the potential for a dividend farther down the road.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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