Talk about bad timing. SOHU's (NASDAQ:SOHU) earnings release yesterday came on the heels of news that the Chinese central bank increased interest rates. Rates had not been raised in nine years, so yesterday's 27-basis-point hike in lending rates came as a total shock. Wall Street hates uncertainty, and the news was yet another example of the vagaries involved in investing overseas. SOHU and other Chinese stocks took a hit as a result.
The bad news did not end there for SOHU. While third-quarter profits tripled year over year to $0.21 per diluted share and were in line with expectations, fourth-quarter forecasts are for a sequential decline to $0.17 to $0.19, which would be significantly below expectations. This is largely due to leading mobile operator China Mobile's one-year suspension of SOHU's multimedia messaging services (MMS). The effect will be even more prominent in the fourth quarter, because there was only a month's worth of impact in the third.
The sanctions on SOHU should actually be beneficial in the long run. This is merely a case of short-term pain for long-term gain. Hitting hard at SOHU's original core business, the suspension resulted in third-quarter wireless revenues down 30% year on year. However, this setback has caused SOHU to intensify efforts in other streams of revenue, and that bodes well.
Aided by the Olympics, third-quarter advertising revenues were up 77% year over year, and at $15.5 million made up 60% of the company's revenue. This number is expected to hold steady in the fourth quarter. SOHU has strength in Web properties -- particularly in sports -- coming in first in traffic rankings for the first nine months of 2004, helped by partnerships with NBA.com and Formula One.
In an interview with Moneyball author Michael Lewis, Tom Gardner established the importance of embracing the unloved. Priced at 22 times trailing earnings, SOHU is clearly the ugly duckling compared with peers SINA (NASDAQ:SINA) and NetEase (NASDAQ:NTES), both of which did not experience MMS suspensions. True, the suspension will take its toll, but as SOHU continues to diversify, it should emerge as a stronger, more balanced company. With both the lackluster fourth-quarter and rate-increase news likely to be priced in following this earnings release, now may be a good time to get into SOHU.
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Fool contributor Tim Goh does not own any stake in the companies mentioned.
