SOHU 1-Yr Chart
WE ARE UPGRADING Sohu.com to Accumulate from Source of Funds and raising our 12-month price target to $22 from $16.
We are lowering our earnings estimate for 2006 to 86 cents from 90 cents mostly due to the slight margin pressure on the company's Wireless Value-Added Services (WVAS) business and increased sales and marketing expenses.
The company is the Internet content sponsor for the 2008 Beijing Olympics, and started amortizing the cash payment for the sponsorship (as part of sales and marketing expenses) in fourth quarter of 2005 for a period of 38 months. For the same reason, we are trimming our fourth-quarter earnings-per-share estimate to 20 cents from 21 cents.
We are projecting a 24% revenue growth in 2007 to $161.6 million. Due to the higher tax rate we assumed in 2007, the company's earnings-per-share growth is 22%, reaching $1.04.
We believe the market may have overly discounted the value of the stock due to its problematic WVAS business. The company's overall organic revenue growth has been higher than its arch rival's in the past three quarters based on our estimate, and its latest 12-month return on equity ranked No. 2 (at 25%) in our universe for the third quarter of 2005. If management could focus on what is already [at] hand and execution, substantial value could be unleashed from the assets (both tangible and intangible) it possesses, in our opinion.