Sohu.com (
SOHU
)
quashed recent rumors of going private in an 8K filed with the
Securities Exchange Commission ("SEC"). The Chinese online media,
search and mobile service provider announced that it has not
approached any investment bank and private equity fund to take
the company private.
Sohu also denied rumors about delisting its common stock from
the NASDAQ Global Select Market. The statement from Sohu was in
response to a report from South China Morning Post, which claimed
that the company is in talks with investment banks about
financing for a potential private transaction. South China
Morning Post cited four industry sources as the base of its
report.
Following the news, Sohu's share price jumped approximately
12.0% to close at $48.84 on Mar 5, 2013. However, post the 8K
filing on Mar 6, Sohu's share price declined approximately 11.0%.
Over the past 12 months, Sohu has underperformed the broader
market as its share price declined 9.2% versus a 12.6% growth in
S&P 500.
The underperformance is due to investors' skepticism on Sohu's
ability to remain profitable in the near term. Although Sohu
reported a better-than-expected fourth quarter of 2012 beating
the Zacks Consensus Estimate on both lines, margins contracted
sharply primarily due to higher operating costs.
Operating expenses as a percentage of revenues were 47.3%
compared with 40.1% in the year-ago quarter. The increase was
primarily due to higher product development costs (up 51.5% year
over year) and sales & marketing expenses (surged 49.9% from
the year-ago quarter). Operating margin declined to 21.5% from
30.9% in the year-ago quarter.
Sohu is a relatively small player in the online Chinese
advertising market and continuing investments in product
development are necessary to expand market share. This is
expected to hurt its profitability in the near term.
Moreover, we believe that market share gain will be difficult
in the near term. Sohu faces stiff competition from
Baidu (
BIDU
)
in search and advertising,
Youku Tudou (
YOKU
)
in online video and
NetEase (
NTES
)
in online gaming markets.
In such a scenario, we believe that the private buyout rumor
creates uncertainty for investors. Although a better buyout offer
will be positive for investors, we believe that current sluggish
macro-economic conditions in China will act as an impediment
toward fetching a higher price.
We also believe that Sohu's strong product pipeline and the
growing popularity of Changyou's games will drive profitability
going forward.
Currently, Sohu has a Zacks Rank #3 (Hold).
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