Sohu's Stock Bounces on Analysts' Defense

I was hoping for more of a sell off in Sohu.com (SOHU) after Friday's "news" that after an Olympic style bump this year in their advertising business, things would return to more normal in 2009. [Jun 20: Sohu.com Sees Ad Revenue Slowing in 2009] Notable Calls blog points out that analysts have rushed to its defense Monday morning, and the stock is bouncing sharply at least for now. Again, gaming not advertising has provided the spark in this name.

• Citigroup notes Friday's sell-off was sparked by a Reuters article confirming what almost everyone already knew: Sohu will face challenging YoY comps on its brand adv side due to a post-Olympics "hangover" effect. However, the firm believes online gaming will continue to power rev and earnings growth in 2009. They were modeling +18% YoY for 2009 adv revs, so the company's expectations of "+20-30% YoY" is actually stronger than their estimates. Finally, they note that online gaming is highly immune from growing inflationary pressures in China, another positive. Accordingly, the firm raises their 2009E estimate, increases tgt to $90 (from $80), and reiterates Buy rating.
• 2Q tracking ahead of plan; 3Q looks excellent - Citi believes both Adv & Gaming are having a strong quarter, and should come in above company guidance. 3Q is also set to be very strong, especially with Olympics adv, which should benefit from Sohu recently being granted the rights to show live streaming video of all events. Sohu is easily one of the, if not the, fundamentally best positioned names for at least the next 2 quarters.

• Merrill Lynch reits Buy & $95 tgt on SOHU after a massive sell-off on Friday triggered by a report by Reuters on growth of Sohu’s online ad, 40% of revenues in 1Q08, to slow down to 20-30% YoY in 09. Even given a significant US market correction on Friday, they see overreaction to the article. Firm also sees Sina as another victim.
• MLCO believes the company has been communicating the same message (slowdown in ad growth in 09) for a few months. They also believe the range is inline, if notbetter, than most analysts’ estimates. For example, they are looking at 22% growth in online ad only and Bloomberg consensus shows a 23% growth in sales (including games and wireless services).
• Firm believes the focus should be on Sohu’s potential margin expansion in 2009, despite lower topline growth. They expect Sohu to obtain a high-tech status and thus a 15% tax rate for 2009. They are also modeling material operating leverage as they expect the reduction in Olympic-related spending next year, est. to be US$15-20m, to be able to offset most of the increase in operating expenses to support organic growth. They therefore expect net margins to improve to 35% in 09.

Disclosure: Long Sohu.com in fund; no personal position

Comments

[tech man:]

sohu is positioned to do really well pre olympic and somewhat thereafter. the sell off friday was a was actually good. now let the games begin. got to love it....now, lets make some money. however, be careful after the olympics again. t.m.

2008 Jun 23 10:16 PM

[Zoltan L. K...:]

SOHU was pointing at the changing nature of its business protfolio and the extraordinary growth at advertising revenue generated by the Olympics. Don't compare this "chinese business model" with GOOG or western internet companys. What they have is pretty good brands, and market proximity.

2008 Jun 24 04:53 PM

[borisb:]

Sohu reported results will have the after effects of the Olympics bubble much more then Sina or Baidu.

2008 Jun 28 10:07 PM