This hasn't been a good week for China's leading online stocks.
Shares of Sohu.com
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
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
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!
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.
Longtime Fool contributor Rick Munarriz has been to China only once, but he relishes admiring its dot-com revolution from afar. He owns no shares in any of the stocks in this article 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.