Baidu (NASDAQ:BIDU) soon may not be the only Chinese search engine that investors can buy on a stand-alone basis. Reports out of China are saying Sohu.com (NASDAQ:SOHU) plans to spin off its Sogou platform as early as later this year.
A source tells Bloomberg that Sogou -- "search dog" in Chinese and the country's third most popular search portal -- is hoping to pull off a stateside IPO valued north of $3 billion. That would be a pretty impressive feat since the market is currently valuing all of Sohu at just $1.7 billion, according to S&P Capital IQ data.
That $3 billion valuation goal may seem even more astounding given that Sogou accounts for less than a quarter of Sohu.com's total revenue. To be fair, Sohu.com is just the majority stakeholder in Sogou. It sold a 40.6% stake in Sogou to Tencent two years ago. However, even 59.4% at $3 billion is roughly comparable to what the market believes that all of Sohu.com is worth.
If Sogou is worth $3 billion, one has to wonder what Qihoo 360 (UNKNOWN:QIHU.DL) would drum up if it took its search engine public. Qihoo 360's platform is China's silver medalist, reportedly generating more than double the traffic of Sogou. If we're valuing China's fast-growing search players based on market share, Qihoo 360's engine could be worth $7.5 billion based on Sogou's $3 billion figure. Qihoo 360's enterprise value clocks in at just $6.1 billion, and like Sohu.com it's a Chinese Internet company that's only generating a tiny sliver of its revenue from its search platform.
Data compiled by Bloomberg Intelligence finds Baidu with a commanding 74.4% of the search market, followed by Qihoo 360 at 17.3% and Sohu.com's Sogou at 6.9%.
Then again, we don't value companies based on market share alone. That's a good thing for Baidu and its enterprise value of $70.7 billion. There are perks for being the top dog -- and not the "search dog" -- in China. When all but a quarter of the queries go through you, marketers know that they need to do business with you. Baidu's rates will naturally be higher, and that bears out when one considers the kind of revenue that Baidu is generating.
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Sohu.com's search engine is growing in popularity and improving its monetization potential. Revenue soared 70% to $119 million in its latest quarter. Baidu, on the other hand, clocked in with total revenue of $2.264 billion during the same three months. Qihoo 360 doesn't spell out how much of its business is being generated from its search engine, but it clocked in at $431.2 million in overall revenue during the same quarter, slightly less than Sohu's total top-line snapshot.
A well-received Sogou IPO during the latter half of this year would naturally bode well for Sohu.com's seemingly depressed share price. Sohu.com's stock has shed a little more than half of its value since peaking three years ago.
The IPO could also bode well for Baidu. Investors will have a company to stack up against Baidu's performance, and it wouldn't be a surprise if Baidu's margins and monetization compare favorably to smaller rivals. Baidu investors don't need to fear a potential Sogou offering, as long as Baidu lives up to its end of the bargain.