ANALYSIS: A Solid Rebound for Sohu Stock

We see Sohu as a longer-term tech play and like the fact they are turning dividends into operating capital.

Author: Steve Kanaval   

As one of China's leading internet companies, all eyes were on Ltd. (Nasdaq: SOHU) as they recently announced their earnings at the end of April, and, for the time being, the company gave investors optimism.

Sohu reported first-quarter revenue of $431 million, down 5 percent year-over-year but about $26 million above the average analyst estimate. Brand advertising revenue slumped 24 percent year-over-year to $43 million; search and search related advertising revenue rose 6 percent year-over-year to $234 million; and online game revenue declined 6 percent year-over-year to $99 million. On a constant-currency basis, total revenue would have increased by about 1 percent year-over-year. The company reported a net loss of $57 million in the quarter.

The company did receive a boost from their majority-owned online game spinoff, Ltd. (Nasdaq: CYOU), which reported $123 million in revenue on the back of the success from TLBB, a PC game.

"Changyou revenues and profit came in ahead of our expectations," Charles Zhang, the chairman and chief executive officer of Sohu, reiterated in the earnings call. "In particular, its PC game revenues rose significantly on a sequential basis. Changyou launched a new expansion pack for the Spring Festival as well as a variety of online and offline events for the holidays and received warm response from gamers."

"Looking out into 2019, we'll continue to execute our strategy of top games and improve our capabilities and efficiency in game development," Zhang continued. "MMORPG mobile games will continue to be our strategic focus while we're also developing a number of casual games and strategy games. With the support of strong cash flow, we believe Changyou is well-positioned to roll out new hit games in the future."

As a result, Changyou declared a special cash dividend of $4.70 per Class A ordinary or Class B ordinary share, that's $9.40 per American depositary share. The total dividend will be approximately $503 million, and about $337 million will go to Sohu. The company said it will not give any of this cash to shareholders, but rather will use it to strengthen operations.


That said, the stock jumped 20 percent on the earnings report as it seems investors believe the narrowing profit loss and cost-saving effort is a positive sign that the company can get things under control and turn a profit in the near future.

Of course, the company is far from out of the woods and it knows that, as they forecast $469 to $494 million in revenue with an estimated net loss between $40 million and $50 million.

We see Sohu as a longer-term tech play and like the fact they are turning dividends into operating capital, do this with transparency, don't overpay executives, and give the shareholders a timeline to receive a similar dividend, and you have something here.

Also, our theme is about globalization as relations normalize into the 2020 election. You have a seminal event on the horizon where the multiples of many of these companies will be lifted in unison by simple agreements between the United States and China. We expect Sohu to retest last summer price levels in the 30's once we get in full U.S. election mode.

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