Sohulogo

Source: Sohu.com.

There is still growth to be found through most of Sohu.com (NASDAQ:SOHU). The dot-com pioneer with interests in portals, gaming, video, and search, posted another quarter of double-digit top-line growth, but it's important to break down the wide disparity of its components.

Overall revenue climbed 17% over the prior year's third quarter to clock in at $430.4 million, but that's an incomplete snapshot since the three segments that account for nearly 95% of Sohu's revenue were all over the map.

Online gaming -- essentially Changyou.com (NASDAQ:CYOU) -- continues to be a laggard. Revenue has declined 7% over the past year to $150 million. This has been partly due to the aging popularity of some of its games including Wartune and DDTank. It also made the strategic decision to make one of its more popular games less difficult. This has helped increase its audience, but it has reduced the revenue generated from virtual items that enhance gameplay. The slide in online gaming for Sohu while the rest of its segments are growing nicely has rocked the revenue mix. Changyou has gone from accounting for 44% of Sohu's top-line results to just 35% over the past year.

Things are holding up much better for Sohu's online advertising business which soared 40% to $247 million, but even that requires a little more of a breakdown since there are two moving parts with dramatically varying growth levels. Sohu's original brand advertising business rose 19% to $149 million, about to surpass Changyou as the top segment. However, the real driver for Sohu's growth is the 86% surge at Sogou. 

In search of Sogou
Sogou is a distant third in search when it comes to China. Market leader Baidu (NASDAQ:BIDU) commands roughly two thirds of the queries in the world's most populous nation, so it's not as if it's going to be losing any serious sleep over the spike at Sogou. Sogou saw its revenue soar 86% to $106 million, a far cry from the $2.2 billion that Baidu delivered during the same three months.

However, with search revenue now up to 25% of the revenue mix at Sohu -- and online advertising in general up to nearly 60% of the top-line pie -- this could lead to the market attributing a higher market premium to Sohu. When Changyou was in the driver's seat it resulted in comparisons to China's many publicly traded online gaming specialists trading at low earnings multiples.

The success at Sogou may lead some to wonder if was a mistake for Sohu to sell a 36.5% stake in the rising search engine to instant messaging and online gaming giant Tencent for $448 million late last year, but it also may have led to the welcome development that finds Sogou posting profitable results for three straight quarters.

Sohu's your fortune teller
Overall profitability is still a problem at Sohu. The silver lining here is that it posted a narrower quarterly deficit than Wall Street was expecting.

The stock initially opened lower on Sohu's top-line results and unflattering guidance. Wall Street was holding out for $437.4 million during the third quarter, $7 million ahead of where it ultimately landed. Sohu's forecast for revenue to chime in between $442 million and $462 million also poses a challenge since analysts are perched at the high end of that range ($461.1 million). 

However, within minutes of trading on Monday morning the stock moved higher. Just like its many operating parts, Sohu's stock chart is also all over the map. With overall revenue growing and Sogou becoming a bigger part of the story, the market could come to embrace Sohu as a dot-com darling again despite the mixed report.

 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu and Sohu.com. The Motley Fool owns shares of Baidu. 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.