In its never-ending quest for respect, Sohu.com (NASDAQ:SOHU) had another reasonable quarter that left the market yawning. Sohu's revenues soared 36% to $34.1 million, better than the 29% improvement that analysts were forecasting. Earnings came in at $0.19 a share, or $0.22 a share before stock-based compensation expenses. Wall Street was looking for profits to clock in flat with last year's $0.18-per-share showing.
This could have been a breakthrough quarter. One has to go back to the fall of 2003 to find the last time that Sohu didn't come within a penny of hitting or missing Wall Street's earnings per share target. Things were different back then. Sohu joined NetEase (NASDAQ:NTES) and SINA (NASDAQ:SINA) as three of the biggest stock market winners, riding the early success of the investing potential of China.
All three were major players in wireless handset entertainment until the government cracked down on inappropriate content. The companies scatted in different directions. NetEase fared the best; it's now the reigning leader in online games, with hundreds of thousands of Chinese citizens playing the company's top games at any given time.
Sohu's model relies more on online advertising these days, taking up a thick two-thirds of the company's revenue pie. Sohu has never left the wireless market, though. To its credit, the June quarter marked the sixth quarter of sequential growth there.
Unfortunately, the company nipped any rally in the bud with a current quarter outlook that is light on the top line and smack dab in the middle of bottom line estimates. After Baidu (NASDAQ:BIDU) got slammed yesterday on the heels of a pretty respectable report, investors are showing little patience with Chinese stocks that don't exactly blow them away. That may very well weigh on the market when SINA and NetEase report next week.
China's potential is significant, but the region's stocks are being tested. Good luck, SINA and NetEase. Don't let Sohu happen to you.
NetEase was recommended to Motley Fool Rule Breakers newsletter service subscribers 19 months ago. SINA has also been singled out to Motley Fool Stock Advisor readers.
Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
