Sohu.com: Focused On Search Engine Market & Online Games For Growth

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Oct 27, 2014

The online gaming and brand establishment market has witnessed exponential growth over a decade. This growth is anticipated to keep its momentum in the upcoming years. The growth is primarily due to increase of internet traffic and introduction of various community websites. China is one of the biggest markets for the online business owing to the fact of its population and the growing use of internet within the country. Various companies have now ventured into this market to reap the unparallel benefit of the online market. Sohu.com (SOHU, Financial), is one such China-based company that is focused to avail the advantage of this growth-oriented market. The company’s stock prices were down by 19.1% YTD, and down by 30.6% on 6 months average, but now it has strongly rebounded in the past 3 month to record growth of 2.2%.

Moderate quarter results

The company recently declared the second quarter earning which seems to be moderate, but was in the range of the management's guidance. Total revenue of $400 million was slightly above the low end of management's guidance range of $397-411 million, and marginally slipping on the consensus estimate of $408 million, missing by 2%. Revenue missed the consensus estimate mainly due to weaker online gaming business for the company, where revenue dropped 9% year-over-year to $154 million.

In spite of the online game disillusionment, Sohu's other significant business lines reported strong revenue growth. Brand promotion revenue was up 33%, to $133 million year-over-year, which was within the anticipated guidance of $130-135 million. The brand publicizing increase was fundamentally attributable to a 85% year-over-year revenue growth of Sohu's online TV channel. Rich video content with domestic and American TV shows leverage the growth of the online TV of the company.

Another good sign for the company is the revenue growth in the search engine market. Sohu's internet search engine subsidiary Sogou saw revenue growth of 82% year-over-year, to $91 million beating the direction of $86-90 million. Furthermore, it reported an operating income of $9 million, up from $0.5 million in previous quarter. This was the second consecutive quarter Sogou attained growth. Sogou's growth was partly attributable to its integration with several popular products offered by its strategic investor Tencent, the second-largest Chinese internet company. Investors are now focused on the search engine business, since the company’s searching engine business is witnessing growth

Some facts that can provide impetus to growth

There are more than half a billion Internet users in China with more than 70% of first-time users surfing the Web on a mobile device.

China’s digital market will be larger than its TV market this year, one of only 12 countries globally, and one of the only Asia Pacific countries apart from Australia. China has the second largest search advertising market in the world behind the U.S., at more than $11 billion in 2014.

Social media ad spend in China will grow the fastest of any of the digital sub-segments, at 67.6 percent compound annual growth rate (CAGR) through 2018. Facebook,Twitter and LinkedIn are the global leader among the community website segment. Since Facebook and Twitter are banned in China, this leaves a wider space for SOHU to acquire the market size in china.

Journey Ahead

Looking ahead at the third quarter, the company anticipates revenue to be in the range of $427-442 million, up by 6.75-10.5% quarter-over-quarter. The non-GAAP net loss is estimated to be $29-33 million. The guided revenue is based on the fact of strong market growth for advertisement inventories amid the FIFA World Cup and Sogou's deeper coordination with Tencent's items.

The company is also focused on its expense budget for generating video content. The price for video content has been constantly rising in recent months, and Sohu will keep putting resources into video content securing to adapt to escalated rivalry.

With respect to the search engine business, the company is more focused on acquiring higher market share rather than the profitability.

In the gaming segment concerning Changyou, the company is still in a transition period where it is spending uncompromisingly on its game platform to attain future growth.

Conclusion

Mobile social will grow by nearly 100 percent CAGR and will make up more than 10 percent of total digital market in China by 2018. Mobile-based advertising comprises 10 percent of digital ad revenues and 3.5 percent of total ad revenues in China. The growing usage of mobile videos provides monetization opportunities to Sohu and the company is certain to benefit from its new games. The stock has also started rebounding to show a growth trends. I would suggest a buy if you are looking for long haul returns.