This hasn't been a good week for China's leading online stocks.
Shares of Sohu.com (NASDAQ:SOHU) fell by 16% yesterday, and Baidu (NASDAQ:BIDU) is taking its lumps today, after the Chinese Internet giants posted disappointing outlooks for the current quarter.
You won't find the negativity in the third-quarter numbers. Both companies handily beat expectations. Sohu revenue grew by 13% to $136.6 million, as double-digit gains at its wireless and majority-owned Changyou.com (NASDAQ:CYOU) gaming divisions more than offset a 2% year-over-year decline in its bread-and-butter brand advertising business. Earnings of $0.96 a share clocked in well ahead of Mr. Market's $0.89-per-share target.
Baidu did even better. Revenue soared 39% higher to $187.3 million. Earnings rocketed by 42% to $2.07 a share and would have come in $0.17 a share higher if not for the company's fledgling -- and profitless -- operations in Japan.
Unfortunately, the near future isn't as market-thumping as the past.
Sohu is targeting a profit of $0.90 to $0.95 a share on $134.5 million to $138.5 million in revenue during the current quarter. The pros had pegged its fourth-quarter profit at $0.99 a share on $140.8 million in revenue.
Baidu's miss is even more grim: The company sees revenue taking a 32% to 36% year-over-year leap. That may sound swell in this iffy climate, but Wall Street was hoping for a 54% top-line surge to $202.9 million. Checking in at $174 million to $180 million -- a dramatic sequential decline, by the way -- won't cut it.
Baidu at least has an excuse. It's in the process of cleaning up its online-advertising business. It has been migrating most of its customers to its Phoenix Nest platform, similar to Google's (NASDAQ:GOOG) AdWords, through which marketers bid for sponsored ads on the side of search results. A large part of Baidu's business until now has been to let advertisers bid for ad placement within its query-result pages. That ethically gray platform is being discontinued. The decision may cost Baidu some money in the near term, but it will make for a more dependable search engine in the future.
Sohu has less of an excuse. A sequential dip in profitability -- and possibly on the top line as well -- doesn't bode well for online display advertising. What we see at Sohu is similar to the trend we're seeing domestically, with brand-marketing specialist Yahoo! (NASDAQ:YHOO) failing to keep pace with paid-search giant Google. Sohu peer SINA (NASDAQ:SINA) doesn't report until next month, but it will probably deliver more of the same.
Chinese Internet stocks aren't broken. However, they have posted significant gains over the past year, Baidu in particular. You have to perpetually beat the market to earn those gains, and it's just not in the cards for the fourth quarter.
