Is Sohu.com Overvalued?

What is an individual investor to think when the price of a stock soars? Certainly, this is a good thing, and it bodes well for the future - right? Well, possibly the best question to ask is whether the stock is overvalued? In the case of Sohu.com (SOHU), the share price recently rocketed from 40 to 50 in 5 days. SOHU caught a ride on the coat-tails of Baidu (BIDU) and momentum players as it tacked on a very impressive 25% gain in market value in one week. Certainly this warrants the questions - is this gain justified, and where will SOHU go from here?

While it can be argued that SOHU has more to gain, it can also be argued that its valuation is excessive. Considering that SOHU's trailing 12 month revenue is $128M, and they paid $40M for the 2008 Olympics online ad rights, going forward they must create a very significant gain in revenue to overcome the costs of the Olympics. Further to this, an officer of the company sold his SOHU holdings on September 5, 2007 - just 25 days before the end of the quarter, (GONG YU Officer 21,969, Direct Sale at $34.95 - $35.25 per share) indicating that the quarter may not be as strong as the street is hoping for.

The run up into earnings is impressive for SOHU, but it too may be excessive. The momentum factor is favorable, and can not be argued against, other that to say momentum plays increase the risk of the stock being subject to huge sell-offs. This often occurs due to the upward momentum creating an opportunity for hedge funds to setup a false sense of security for longs, and then the hedge funds pull the rug out from under the longs with massive shorting at the elevated prices.

As for SOHU's core business as an internet portal, there have been actions by the Chinese government that have greatly impacted internet usage in China recently. Internet controls and a nationwide program to control political dissent, excessive game play, and pornography on the internet resulted in the government shutting down many internet cafes, placing usage restrictions on the players of games, and severely restricting messaging on the internet. This is a big deal to SOHU as their growth is dependent on greater and freer access to the internet. Simply put, the government of China is not facilitating this access, but rather restricting it - and it would be naive to think that this does not have a direct impact on the usage and ad revenue of SOHU.

Adding up all of these factors:excessive valuation; excessive price movement; costly payout for Olympics; insider selling at key time of quarter; restriction of internet access/usage by the government; and hedge fund "raise and dump" plays, it would seem that SOHU is more risk than reward.

Disclosure: none

Comments

[sohu long]

nice analysis. Good thing I am long and dont follow this article. Stock was only up 8.00 today....rob

[MSA]

Ho Rob: Yes it is a good thing you are/were long SOHU. I stand by my assessment that SOHU is overvalued; but that does not amount to much in the face of the momentum push it has received.

The earnings numbers were better than I expected, and that is a credit to the diversification of SOHU into gaming. If SOHU did not have the gaming revenue increase of nearly $12M, then the quarter would have been a disastor. Again, this is to the credit of SOHU. However, the gaming market in China is very fickle, and there is no guarantee that SOHU will continue to bolster it's overall revenue with gaming revenues.

But, alas, SOHU has proven me wrong this quarter. Although, even those who are big believers in SOHU, must be looking at the current run-up in valuation, and asking the same question I posed - "Is SOHU.com Overvalued?"

GL

[sohu long]

nice analysis. Good thing I am long and dont follow this article. Stock was only up 8.00 today....rob

[Common_Sense]

You are spot on with your analysis.

Have you noticed that all of the live content on SOHU's English language site is from the year 2006 or earlier? Am I the only one noticing this?

I would tend to agree strongly with you that, "it would seem that SOHU is more risk than reward."

[Common_Sense]

You are spot on with your analysis.

Have you noticed that all of the live content on SOHU's English language site is from the year 2006 or earlier? Am I the only one noticing this?

I would tend to agree strongly with you that, "it would seem that SOHU is more risk than reward."