Sohu Downgraded to Strong Sell - Analyst Blog

By Zacks Equity Research,

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On Jul 4, 2013, Zacks Investment Research downgraded ( SOHU ) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Sohu reported earnings of 60 cents per share that comfortably surpassed the Zacks Consensus Estimate by 4 cents. Revenues jumped 35.7% year over year and 2.7% sequentially to $307.6 million, ahead of the Zacks Consensus Estimate of $290.0 million.    

Although Sohu reported an impressive first quarter, escalating costs remain a major headwind going forward. Operating expenses, as a percentage of revenues, were 43.3% compared with 41.9% in the year-ago quarter.

The sharp year-over-year rise in operating expense was primarily due to higher sales & marketing expenses, which as a percentage of revenues jumped 200 basis points (bps) to 19.1% in the reported quarter.

Sohu is a relatively small player in most of the markets it operates in. Hence continuing investments in product development and sales and marketing are necessary to expand market share as well as fight competition. This will keep margins under pressure going forward.

Moreover, higher stock compensation expense ($2.0 to $3.0 million) is expected to reduce earnings by 5 to 7 cents in the second quarter.

The Zacks Consensus Estimate for the second quarter of 2013 has declined 9.3% (5 cents) to 49 cents over the last 30 days.

The Zacks Consensus Estimate for 2013 decreased 2.6% (7 cents) to $2.58 per share over the last 60 days. The Zacks Consensus Estimate for 2014 dropped 5.9% (23 cents) to $3.69 per share over the same period.

Other Stocks to Consider

Not all Internet service providers are performing as poorly as We recommend Akamai Technologies ( AKAM ) and Yahoo! ( YHOO ) , both with a Zacks Rank #1 (Strong Buy). Facebook ( FB ) , a Zacks Rank #2 (Buy) stock, is also looking good at present.

AKAMAI TECH (AKAM): Free Stock Analysis Report

FACEBOOK INC-A (FB): Free Stock Analysis Report

SOHU.COM INC (SOHU): Free Stock Analysis Report

YAHOO! INC (YHOO): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AKAM , FB , SOHU , YHOO

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