Sohu's first-quarter profits more than doubled to $1.15 a share, as revenue climbed 36% to $115.7 million. Analysts were expecting earnings of just $0.99 a share on $113.3 million. The performance probably didn't surprise shareholders, though. They've seen Sohu top Wall Street's profit targets in each of the past eight quarters.
The real driver at Sohu is its online gaming business, which has soared 50% higher over the past year to gobble up more than half of the revenue mix. Sohu's brand advertising business inched 16% higher, and that's welcome news in a stale environment for marketers. Of course, it's also chopped liver next to Baidu's
Sohu successfully took Changyou public last month. The market debutante was priced at $16 a share and has more than doubled since then. Now that Sohu owns only 71% of Changyou, will it need to breathe new life into its bread-and-butter portals to resume its growth streak?
That's a fair question. Sohu is now projecting non-GAAP profitability of between $0.80 and $0.85 a share this quarter. Wall Street is perched higher, so this should be the first time in two years that analysts have to take down their guesstimates. Changyou's guidance for the current quarter is well ahead of analyst estimates, so the culprit for Sohu is either a projected slowdown in its online advertising business or the failure of Wall Street's finest number crunchers to accurately account for last month's partial spinoff.
Sohu's new guidance wasn't raining on the stock's parade this morning, because Sohu is still one of the cheaper growth stocks out there. It now trades for less than 15 times trailing earnings, and that's before we back out the company's cash-rich balance sheet. Sohu closed out the period with $373.2 million in cash equivalents, and it will receive net proceeds of $128.3 million as part of last month's Changyou IPO. Sohu is thus well positioned if it decides to buy its way out of its brand-advertising lull.
Plenty of online gaming companies in China are fetching low earnings multiples -- Shanda Interactive
Other games to play in China:
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Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.