Why Sohu.com Will Continue To Capitalize On Search In China

Feb.10.14 | About: Sohu.com Inc. (SOHU)

Sohu.com Inc. (NASDAQ:SOHU) is set to report FQ4 2013 earnings before the market opens on Monday, February 10th. Sohu.com is one of the largest internet service companies in China. Through its subsidiaries Sohu.com provides a search engine, paid advertising, and multiplayer on-line games. Last quarter SOHU entered a partnership with Tencent Holdings Limited (OTCPK:TCEHY) in which Tencent took a 36.5% stake in Sogou, Sohu's search business. Under terms of the agreement, Tencent's search related business will be merged with Sogou which will continue to operate as a subsidiary of SOHU. Although analysts expect this deal to continue to grow Sohu.com's revenue, the company is expected to report a loss this quarter. Here's how investors expect SOHU to report earnings Monday.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

(Click Here to see All Estimates for Sohu.com)

The current Wall Street consensus expectation is for SOHU to report -32c EPS and $387.39M revenue, while the current Estimize.com consensus from Buy Side and Independent contributing analysts is -32c EPS and $387.95M revenue. This quarter the buy-side as represented by the Estimize.com community is expecting SOHU to report in-line with Wall Street on profit and exceed slightly on revenue.

By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors, Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly, it does a better job of representing the market's actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a very small differential compared to previous quarters.

The distribution of estimates published by analysts on the Estimize.com platform range from -28c to -36c EPS and $386.69M to $391.39M in revenues. This quarter we're seeing a smaller distribution of estimates compared to other quarters.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A narrower distribution of estimates signaling more agreement in the market, which could mean less volatility post earnings.

Throughout the quarter, the EPS estimate from Wall Street decreased from 25c to -32c, while the Estimize consensus entered at -31c and slipped to -32c. Over the same time period Wall Street reduced its revenue expectation from $390.10M to $387.39M while the Estimize forecast slipped from $388.19M to $387.95M. Timeliness is correlated with accuracy and we saw negligible analyst revisions going into the report.

The analyst with the highest estimate confidence rating this quarter is BB9166 who projects -30c EPS and $389.50M in revenue. In the Winter 2014 season BB9166 rated as the 20th best analyst and is ranked 57th overall among over 3,800 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case BB9166 is expecting Sohu.com beat the Estimize.com consensus on both profit and revenue.

This quarter contributing analysts on the Estimize.com platform are expecting Sohu.com to report a loss, but grow year-over-year revenue by 30%. SOHU's recent deal with Tencent should help drive traffic and allow the company continue to improve its capitalization of its search business.

Disclosure: No positions.