Sohu Q3 Earnings Preview: Challenges From Multiple Fronts

| About: Inc. (SOHU)

Sohu (NASDAQ:SOHU) report Q3 results on November 5th.

The Street expects:

  • Revenue: $276 million
  • EPS: $0.43 per share
  • Q4 revenue guide: $289 million

Sohu's online gaming unit, Changyou (NASDAQ:CYOU), is also expected to report on that day.

The Street expects Changyou to generate:

  • Revenue: $155 million
  • EPS: $1.32
  • Q4 revenue guide: $160 million

Heading into the earnings, weak macro environment and emerging competition will likely to weigh in on branded ads business, Sogou and online video. Online gaming will continue to be the bright spot, but the lack of blockbuster game is another concern.

Macro and Weibo to weigh in on branded ads.

Aside from the weak macro environment that is negatively affecting Sohu's branded ad business, competition from social media, specifically Sina's (NASDAQ:SINA) Weibo, may take market share away from Sohu's web portal just as it might cannibalize Sina's own portal business. While Sohu also has its own form of microblogs, it seems that the social media gravity in China is shifting towards to main platforms, Weibo and Tencent's WeChat, which leaves little growth for Sohu in the microblogs space.

Qihoo's entry into search is a key concern for Sogou Search

Qihoo's entry into search in August greatly undermined the success that Sogou has achieved over the past two years. Within a month after its entry, Qihoo captured 10% search traffic share in China, and Sogou commands 7-8% market share. While Sogou has an advantage over Baidu (NASDAQ:BIDU) in that it commands a large browser user base (110 million at the end of 2011), the unit is still no match for Qihoo, whose browser user base is at least twice as large as that of Sogou, according to data from iResearch. Therefore, Qihoo might take market share away from Sogou if it is unable to take market share away from Baidu.

Youku-Tudou solidifies market leadership while iQiyi puts pressure on Sohu Video

Sohu Video, which once thought would overtake Tudou to become the second largest online video platform in China, now faces a bigger juggernaut in Youku-Tudou (NYSE:YOKU). In addition, Baidu's iQiyi is gaining tractions in the online video space, which adds additional challenge to Sohu Video's growth.

Changyou the only bright spot, but the unit has yet to deliver a blockbuster game

Sohu's robust topline growth in Q2 was primarily driven by its gaming unit, Changyou . Changyou's Tian Long Ba Bu, now in its 5th year of operation, continues to be well-received by gamers in China. In addition, the recent acquisition of 7Roads has been accretive to Changyou's gaming portfolio and user growth.

However, Changyou has yet to deliver a blockbuster in-house title. The previous much-anticipated in-house game, Duke of Mount Deer, has not gained any meaningful traction and this raises the concern of whether Changyou still has the brain power to create a blockbuster title that can maintain the company's future growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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