Sohu.com (NASDAQ:SOHU) shares soared 11% last week, fueled by the market's hearty reception for the Chinese Internet stock's encouraging quarterly report.
The dot-com pioneer with interests in portals, gaming, video, and search saw revenue clock in at $522.1 million for the third quarter, 21% ahead of where it was a year earlier. That was a welcome contrast to Sohu's own guidance issued over the summer when it was targeting just $470 million to $500 million in revenue for the period.
This is actually Sohu's weakest year-over-year growth in quarterly revenue in a year. If we go by the compounded annual growth rate over two years we have to go all the way back to 2010 to find a lower rate, according to S&P Capital IQ data. This clearly didn't bother Mr. Market. It didn't hurt that after several quarters of investing in its new ventures it pulled off its first quarterly profit in more than a year.
There was a mixed showing within Sohu's various businesses. Unlike the scene that played out three months ago when all three of its major revenue streams managed to deliver double-digit top-line growth on a year-over-year basis, we saw only one of those streams come through with notable growth this time around.
Sohu's original brand advertising segment rang up revenue of just $152 million, up 2% since the prior year's third quarter. Growth at its video hub was partly offset by declines through the rest of the Sohu.com portal. The news didn't get any better for its gaming business -- essentially the online gaming arm of Changyou.com (NASDAQ:CYOU) -- where $153 million was flat with last year's results. Changyou's online gaming revenue also posted a 12% sequential dip. It's a struggle at Changyou, with growth in mobile apps being wiped out by declines in its original PC-based diversions.
This brings us to Sogou, Sohu's promising search engine. Its revenue soared 53% since a year earlier to hit $162 million. This is the first time that search is Sohu's largest top-line contributor, and that's notable given the high-margin nature of paid search.
Sogou is China's third most popular search engine, and while it's a distant bronze medalist to Baidu (NASDAQ: BIDU), we have been seeing revenue climb a lot faster at Sogou than Baidu in recent quarters. Baidu's total revenue during the same three months rose 36% since the prior year. This doesn't mean that Baidu needs to keep an eye on the rearview mirror, but it could force the market to value Sohu more like a search engine and less like a brand advertising or online gaming company.
Seeing Sohu as Sogou will get easier. Guidance for the current quarter suggests sequential and year-over-year declines in online gaming and brand advertising. It will be search carrying the team toward growth again.
Sohu's outlook calls for just $435 million to $465 million in revenue for the current quarter, but we've seen how conservative it has been with its guidance lately. Armed with $1.33 billion in net cash, it's also in a favorable position if it feels the need to acquire its way to growth outside of Sogou. The market likes Sohu, and it might even understand Sohu now.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Sohu.com. 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.