After Sohu And Changyou Drop, What Will Happen To Sina And Baidu?

by: Bill Maurer

Shares of multiple Chinese internet names fell on Monday, after weak guidance from Sohu (NASDAQ:SOHU) left many to believe future growth prospects were not as bright as previously hoped. Sohu led the group down, and its gaming subsidiary (NASDAQ:CYOU) fell along with it. Losses extended into other names in the space, which I'll cover later on in the article.

Sohu reported fourth quarter numbers that were very mixed. Revenues for the quarter came in slightly above $246 million, which was a bit better than the $243.75 million that was expected. However, GAAP earnings per share fell to $0.65 from $1.07 in the prior year period. Non-GAAP earnings came in at $1.36. Analysts had expected earnings to rise to $1.24. That's a big miss.

Guidance was also a problem for Sohu. The company projected first quarter revenues to be in a range of $219 million to $225 million, well below the $238 million plus expected by analysts. The company did not provide GAAP earnings per share guidance, but said non-GAAP earnings per share would be in the range of $0.50 to $0.55. Analysts are currently expecting $1.13.

The fall in Sohu led to a drop in as well, which is Sohu's gaming subsidiary. Changyou's earnings report was actually decent; a lot better than the one we got from Sohu. For the quarter, Changyou reported revenues of $137.7 million, well above the $124 million analysts had expected. Including a gain from a business Sohu sold to Changyou, Changyou posted a GAAP profit of $1.21 and a non-GAAP profit of $1.33. Both numbers were well above the $1.09 expected.

Changyou's guidance was mixed, but again, it was a lot better than the guidance from Sohu. Changyou stated that first quarter revenues are expected in the range of $130 to $134 million, while analysts currently are only expecting $128.4 million. However, non-GAAP earnings per share guidance of $1.08 to $1.12 was a little light as analysts are looking for $1.13.

Sohu fell more than $9 on the bad earnings report, which equated to a drop of nearly 15.3%. In sympathy, despite the much better report, Changyou fell by 13%. So what does this mean going forward for other names like Baidu (NASDAQ:BIDU) and Sina (NASDAQ:SINA)? Let's take a look.

First, I will say that Sohu deserved to be punished for its weak report and guidance that was well below expectations. However, I don't think the 13% drop in Changyou is justified, and I picked some up Monday morning for a quick trade. I think it will rebound quickly.

Baidu fell a little more than $3 on the news as well. Baidu announced Monday that it will report earnings next week, after the close of trading on the 16th. This is a big report for Baidu, as we saw bad numbers recently from Google (NASDAQ:GOOG). Analysts are expecting Baidu's revenues to grow by nearly 88% for the quarter, and earnings per share to jump by nearly that amount as well. That's a lot of growth expected, and if Baidu misses like Google did, look out below. Shares could fall to $100 and quickly. Remember, Baidu's market cap is over $45 billion. Sohu and Changyou combined don't even reach a market cap of $4 billion.

The bigger impact was on Sina, which saw its stock decline by more than 6.5%. Sina, like Sohu, operates in the advertising business, which could set up a worrisome quarter when they report (most likely late February). Sina does have a game segment, which seems like it could do well from what we heard out of Changyou. However, mixed results aren't good enough. These names not only need to beat on the top and bottom line, but the guidance needs to be spectacular as well.

It was a bad day for the Chinese internet names. Sohu's report was a bit weak, and their guidance left a lot to be desired. Changyou's quarter was not as bad, but the stock sold off as well. Baidu and Sina also saw some losses. I think that Changyou and Sina will recover some of their losses first, but you have to be careful with Baidu and Sina going into earnings. They will see similar declines if they miss as well. These names trade at high price to sales ratios, and if the sales growth isn't there, stock price appreciation won't happen. Investors are hoping that today's bad news was just one bad quarter, but we'll find out over the next few weeks how the remainder of this sector is doing, and those reports will be crucial.

Disclosure: I am long CYOU.

Additional disclosure: Author long CYOU at time of writing, but will exit position this week.