Sohu (NASDAQ:SOHU) is losing market share in the one service most important to the rest of its business: search. While the company sees its strengths in content, Sohu may find its content businesses killed by search competitors Baidu (NASDAQ:BIDU) and Qihoo 360 (NYSE:QIHU). Here's what you need to know before investing in these stocks.
Sohu's future: A CEO perspective
While you may think that Sohu is caught in a balancing act between content production and building distribution channels, it seems CEO Charles Zhang places greater importance on the latter --Sogou.com. In May, Bloomberg quoted Zhang about the challenges facing Sohu:
[The company] has to produce the best quality content either text based, picture based, or video motion picture based, and at the same time it has to have channels... Sogou is very important, it is an access and a channel.
That makes sense. Sogou.com is one of the primary ways people find out about Sohu's other services like Sohu TV, games, and online portal. This, in turn, creates an ecosystem of products through which Sohu can sell more advertising options to its partners. This strategy has worked since the company's early days and continues today. Last month, profits rose 14% to $23 million, beating analyst estimates.
Can Sohu fend off Baidu and Qihoo?
Despite a great first-quarter report, Sohu has had a lackluster year. During Zhang's sabbatical year, Sogou.com's search market share slid, falling almost 30% from 7.7% of the search market to 5.4%.
That's partly because of Qihoo. As you may know, the anti-virus maker launched into the search space last year and claimed as high as 12% of the market. Currently, it hovers around 8% of the market. We also have Baidu, which still dominates with about 80% of the search market. Put together, these two giants (both second and first place, respectively) have squeezed smaller competitors like Sogou.com out of the search market.
Luckily, Sohu isn't completely doomed. Right now, the company has a $1 billion war chest. That's HUGE. For comparison, Qihoo only has about $400 million in cash and short-term investments. Needless to say, Sogou has a good chance of taking Qihoo in search, especially now that the Chinese government is watching Qihoo more closely.
Of course, Baidu won't fall down very easily, if at all, with its $5.5 billion hoard. Far bigger than Qihoo and Sohu, Baidu commands a market cap of about $34 billion. The good news for Sohu investors is that with greater size comes greater threats. With less visibility but a sizable war chest, Sogou may be nimble enough to outsmart Baidu in some search niches.
Is Sohu stock a buy?
While it's great to see founder Charles Zhang back at the helm of Sohu, there are still many uncertainties with the company. Yes, it has $1 billion and is focused on the challenges ahead of it, but without strides in its "access" and "channel," I'd be hesitant to invest in this content-based company.
Fool contributor Kevin Chen owns shares of Baidu. You can follow him on Twitter at @TMFKang or on Google+. The Motley Fool recommends Sohu.com. It recommends and owns shares of Baidu. 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. The Motley Fool has a disclosure policy.