Sohu Earnings Preview: Continued Growth In Search; Margin Deterioration A Concern

| About: Inc. (SOHU)

Sohu (SOHU) reports Q2 results on August 6th.

The company's gaming unit, Changyou (CYOU), is expected to report on the same day.

The Street expects:

  • Revenue: $248 million
  • EPS: $0.39
  • Q3 revenue guide: $274 million

Last quarter, Sohu guided for a weak Q2 due to bleak brand ad outlook and lower profit outlook ahead of heavy investment in its video and search business.

Sohu is undergoing a year of investment to diversify away from its gaming business and make its search and video business more relevant and profitable. Heading forward, margin deterioration will continue due to headcount expansion and marketing spend.

Despite near-term weakness, I am quite positive on the company's Sogou search as it will likely to deliver another round of robust topline result. As I mentioned in my April 10th note titled "Sogou: An Emerging Threat To Baidu's Dominance", Sogou's comparable search result to Baidu (BIDU) and widely used Sogou Browser have allowed Sogou gain some traction in China's online search market with approximately 3% market share by revenue. The low market share indicates significant upside for growth as Google (GOOG) eventually loses its relevancy in China's search market.

However, I remain on the sideline for now due to low visibility on margins and profit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.