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Sohu.com (SOHU) is not a company currently in the portfolio but one on my radar. Aside from an interesting space, this company fits in with the 'Separating Chaffe from Wheat' crowd, in that despite being a volatile Chinese stock, it never broke the 50 day moving average even during the worst of the selloff in November. This shows a lot of strength and pushed the stock from my long term watch list to my immediate attention.

I was hoping to add Sohu.com (SOHU) on a pullback to the mid $50s, but last night the company had to go and raise guidance for the quarter. Darn them....

  • Chinese Web portal Sohu.com Inc (SOHU) raised its fourth-quarter outlook as its Tian Long Ba Bu online martial arts game is proving more popular than expected, sending the company's shares up almost 6 percent after-hours.
  • Online games have wide appeal in China, where they make up one of the single largest Internet segments, linking thousands of players who compete within a virtual role-playing world. China's online game market is expected to grow at an average 11 percent a year from 2007-2017, Credit Suisse said.
  • For Sohu, or "search fox" in Chinese, Tian Long Ba Bu marks a renewed foray into gaming, as the company looks beyond its search engine roots to social networking services like blogging and video-sharing.
  • Sohu had a 3.3 percent share of China's 2.91 billion yuan ($393.8 million) online game market in the third quarter, behind leaders Shanda Interactive Entertainment (SNDA), Netease.com Inc (NTES) and Giant Interactive Group Inc (GA), according to research firm Analysys International.
  • Sohu raised its quarterly earnings forecast by 3 cents to 36-38 cents a share, excluding share-based compensation costs, and increased its total revenue forecast by $2 million to $55.5-$57.5 million.
  • October-December advertising revenue forecast was kept at $31-$32 million.
  • Analysts on average expect the company to earn 29 cents a share, before items, and post quarterly revenue of $55.4 million, according to Reuters Estimates.

Sohu.com's business has 'evolved' quite a bit over the years - I used to invest in these type of stocks in my personal account about 2-3 years ago when they were very different type of companies, focusing a lot more heavily on the wireless market. There are now a number of Chinese gaming stocks public in the U.S. - this is a part of the Sohu business, but as the article stated, with only 3% share, it's not a leader in this space.

The interesting component to me is the advertising  - so one could look at Sohu as a "very very very" poor man's Baidu.com (BIDU) - and I mean that in a very distant comparison - Baidu.com is the king - Sohu is a distant third cousin - but the upside could be very meaningful in advertising over the years as even the distant third cousin should do very well over time in such a young space.

When I first read the news I was hoping the upside surprise would of come from the advertising space instead of the gaming space, but beggars can't be choosers. Sohu.com is pricey at 40x 2008 estimates, and has had quite a run this year. Again, judging from it's strength in the recent sell off, this appears to be a stock that institutions want to be in and its relative strength is very appealing. And a company under promising, and over delivering (raising guidance) is one who is playing the "Wall Street" game correctly. I am still going to hold off and hope for a pullback to a more preferable stock price to begin a position.

Disclosure: No position

Source: Sohu.com Raises Guidance, Shows Signs of Stability