Steven Cohen and the Chinese Web: Assessing His Purchases and Sales
Recently, Steven Cohen sold out his share at Baidu Inc. (BIDU) and instead bought a piece of Sohu.com Inc. (SOHU), two billion-dollar Chinese web companies. However, the trend among investment gurus was the opposite: buying Baidu’s shares and selling Sohu.com’s. I will look these two companies in order to find out if Steven Cohen is right about swimming against the current, or if Baidu’s prospects are better than those for Sohu.com
If You Missed Out on Google…
Baidu is a Chinese-language Internet search provider, with a market cap of more than $51 billion. The company also offers Japanese search and online marketing services. After a stagnant first half of the year, the company's stock price started to rise substantially, especially after the company reported second quarter earnings in July. Since Steven Cohen sold out in late June, the stock was up almost 60%, actually. So, what is making the stock rise? And, is it still a worthy addition to your long-term portfolio?
According to third party researchers, Baidu controls more than 70% of paid search dollars spent in China. As the leading search engine in China, the company seems poised to benefit from the increasing corporate spending on paid searching, as a way to achieve more effective and measurable marketing results. Particularly, the increasing adoption of paid searching among small and medium-sized businesses is expected to be the main growth catalyst over the next few years, since the company targets these through aggressive marketing a large, nation-wide sales force.
A decade dominating the paid search business has provided Baidu with an invaluable intangible: experience. The company can provide great business leads to advertisers due to the particular insight into the behavior of Chinese Internet users that it has.
Although Baidu's performance in the mobile segment was a little sluggish at first, recent acquisitions have made it the largest mobile game and app distributor in China, the largest smartphone market in the world. As its investments pay off, the company will assert its dominance in the mobile arena as well.
Financially, Baidu looks amazing. Its growth rates, margins and returns are among the industry's best, although its debt levels are a little concerning. Trading at 44 times its trailing earnings, but expected to deliver average annual EPS growth rates above 20% over the next five years, this looks like a stock to buy and hold. Follow the examples of Frank Sands (Sands Capital Management), Robert Karr (Joho Capital) and Dodge & Cox, among many others. If you missed out on Google (GOOG), don´t miss out on its Chinese version.
So, Who Said Steven Cohen Can't Be Wrong?
Sohu.com is a Chinese online media, search, gaming, community and mobile service group. With one of the strongest brand names in the country and huge amounts of page views and registered users, the company holds strong growth potential. Actually, analysts expect it to deliver average annual EPS growth rates of more than 18% over the next five years. But, what is fueling these projections? And why are Jim Simons (Renaissance Technologies LLC), Bruce Kovner (Caxton Associates), Louis Moore Bacon (Moore Capital Management, LP), Orbis Investment Management Limited and Platinum Investment Management Limited, among several others selling their shares?
A wide services portfolio helps Sohu.com generate an ever-increasing traffic. This, added to the “ability to combine display ads, embedded video ads, paid search, and in-game ads in an integrated marketing solution to attract advertisers” (Morningstar) bode well for the company´s future. In addition, a recently announced alliance with Tencent (TCEHY) should help the company increase its traffic and its cash income.
However, the company´s advertising market share based on revenues is quite small (3.1%), compared to Baidu's (78.6%) and Google China´s (15.6%), data for 2012, according to EnfoDesk. Furthermore, the fierce competition for advertising in China could further reduce Sohu.com´s market share over the longer term. Customer concentration is another concern for the company´s stockholders. With its five largest advertisers accounted for 10% of total brand advertising revenues, any reduction in their spending or the switching of one of them to another company would have a disproportionate impact over Sohu.com´s finances.
Finally, its huge dependence on its online gaming segment (which accounted for 54% of the total revenue in 2012), make risks even higher, as competition increases and huge gaming companies like Electronic Arts (EA) and Activision Blizzard (ATVI) enter the Chinese market.
Trading at 30 times its earnings while offering little certainties about the future and below average margins and returns, this is a stock to stay away from at the time.
Although I hate to differ with an investment guru like Steven Cohen, my fundamental analysis on Baidu and Sohu.com reveals that the first one constitutes a better investment for the long term. Considered to be the Chinese Google, this market leader holds several growth catalysts that should fuel revenue and margin expansion over the years ahead.
Disclosure: Damian Illia holds no position in any stocks mentioned.