After a week that saw investors selling off many of China's leading Internet stocks, Sohu.com (SOHU 0.70%) didn't given them any reason to have seller's remorse. Shares of the dot-com pioneer opened 9% lower and were trading 16% lower a couple of hours into the trading day after posting uninspiring quarterly results.
The top line itself wasn't brutal. Revenue climbed 29% to $368.3 million, and that's actually better than the 28% uptick that Wall Street was targeting. There was healthy growth in Sohu's brand advertising and search marketing businesses, offset by dips in mobile and online gaming. Weakness in the latter is why Changyou.com (CYOU +0.00%) -- Sohu's majority-owned business that was spun off seven years ago when online gaming was booming -- is falling even harder than Sohu today.
Net income at Sohu declined 23% to $41.1 million, but that wasn't a surprise. Margins have been contracting at many of the Chinese dot-com leaders as they invest to expand in new areas. But there comes a point where the makeovers can get too costly. Sohu's guidance calls for revenue in the current quarter to clock in between $378 million to $390 million. That's solid. It's healthy growth on both a sequential and year-over-year basis. It's also ahead of where the pros were perched, expecting revenue to come in just shy of $370 million.But breaking down Sohu's guidance shows that it's forecasting a sequential decline in its flagship brand advertising business. Sohu is also eyeing an adjusted net loss for the period, proving once again that this makeover process isn't for investors that live and die off bottom-line growth.
Sohu still seems to be the better bet than Changyou here. Yes, guidance calls for online gaming revenue to bounce back sequentially this quarter. But Sohu still offers a healthy way to play China's Internet as the market assesses what its Sogou search engine would be worth in outright sale. Sohu sold a 36.5% stake in Sogou to Tencent for $448 million last month, a move that helped push Sohu's cash and equivalents above $1.2 billion. Qihoo 360 was widely reported to be interested in Sogou, but Sohu chose to sidestep China's second-largest search engine in favor of forging an alliance with one of China's leaders in online gaming and instant messaging. Qihoo 360 could have had nearly 25% of the market with a transaction, but now it will have to claw its way into more market share organically.
In short, Sohu's sell-off today appears overdone. Business is still growing at a healthy clip, and it will simply be a matter of time before Sohu can piece together all of the investments that it has been making these days to offer up a bigger and better company.
