The market loved Sohu.com's
Sohu's fastest-growing segment was paid search, as its Sogou.com engine delivered a 183% surge during the period. The showing easily upstaged the 45% spurt in online display advertising and the 32% uptick in its Changyou.com
In other words, paid search is unlikely to move the needle -- for now.
Over the years, Sohu has come in many different wrappers. It was one of the market's best performers in 2002 when it was seen as an early play on China's mobile content, until the Chinese government and wireless carriers cracked down on third-party value-added service providers.
Sohu went on to emphasize its website properties, culminating in being tapped China's official online portal of Beijing's Olympic Games in 2008.
Once the global games came and went, it was online gaming's turn to take the baton and run its leg of the relay race. It's a strategy that worked well for both NetEase and Sohu, leading to Sohu taking Changyou public.
Is it now paid search's turn to run?
It's a laughable notion today. Paid search's gross margins are actually clocking in lower than Sohu's three other businesses. If you think a 5% slice of the revenue mix is measly, you'll shake your head at paid search's gross profit clocking at 2.4% of the total gross profit.
Not so fast, though.
Sohu sees Sogou contributing $11 million in revenue during the current quarter, a healthy sequential pop that now finds it commanding nearly 6% of the second quarter's projected revenue.
Sogou's gross margins of 39% can also use some improvement, and not just because they were at a mere 3% a year ago and 32% just three months ago. Baidu's
During yesterday's analyst call, CEO Charles Zhang revealed that Sogou has just 4% of China's search engine traffic but just 1.6% of the revenue. It's also Zhang's goal to be at 20% of the market in a few years.
Cynics will argue that Zhang's dreaming. Baidu commands roughly two-thirds of China's market with no signs of letting up. Google's
However, Sohu commands less than 10% of Baidu's market cap. If Sogou is able to gain traffic share, advertisers will come along to help prop up its share of the revenue. Margins will improve, even if they don't reach Baidu-esque levels. It may be a lottery ticket at this point, but Sohu investors also have the thriving display and online gaming endeavors to fall back on if Sogou remains a bit player in paid search.
It's a good place to be, as Sohu hones its craft under Baidu's long shadow.
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Google is a Motley Fool Inside Value recommendation. Baidu, Google, and Sohu.com are Motley Fool Rule Breakers picks. The Fool owns shares of Google. 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.
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. He 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.