Sohu And Changyou Stir Growth Doubts For China Web Ads

Investor's Business Daily

Chinese Internet stocks have been flying high for weeks, but Monday's crash-landings for Sohu and Changyou raised concerns about online advertising growth as the world's No. 2 economy loses some steam.

Shares of Sohu (SOHU) fell 10% and its majority-owned unit Changyou.com (CYOU) dived 20%.

The gaming firms beat on Q2 profit per U.S. share. Changyou's rose 9% to $1.41; Sohu's more than doubled to 56 cents.

But they missed on revenue and gave weak guidance for the current Q3. That may be a sign that ad growth might be slowing along with other macro conditions in China. That would be a big deal, said New York Global Group analyst Benjamin Wey.

"When companies aren't doing great, you have a lot of people not advertising," Wey said. "I would not get too excited over anything China related right now.

Sohu and Changyou had benefited in recent weeks from an influx of interest in Chinese Internet firms, said T.H. Capital analyst Tian X. Hou.

"The fundamentals for most haven't changed," she said. "It's mainly perceived changes.

But Hou also is seeing increased competition, consolidation and investment in new technology — all factors that have pushed shares higher, even for companies not directly involved.

Other China Nets Hold Up

Baidu (BIDU) shares are up 36% this month, while rival Qihoo 360 Technology (QIHU) has gained 30%. Perfect World (PWRD) is up 18%. Gaming company YY (YY), set to issue Q2 earnings Thursday, has jumped 123% since its Q1 report.

Sohu and Changyou didn't rock Chinese Internets Monday. YY rose more than 1% to a fresh closing high. Baidu advanced 1% to a fresh 11-month closing high after spiking 11% last Thursday after its Q2 earnings report. Qihoo and Perfect World lost 3% but are near recent peaks.

Analysts warned Monday that the uptrend may not continue.

"As a trend, from the macro prospective, I am not excited about the Chinese Internet sector," Wey said. "There's certainly a macro slowdown in China, and some people are wondering what will happen with these Chinese companies.

Sohu, for example, got a boost earlier this month from July 19 news that it was seeking to sell its search engine, Sogou, and had entered talks with Qihoo, says Hou. That also gave Qihoo stock a boost, although there's no deal yet. Qihoo also has benefited from local reports about gaining ground on Baidu in search, though its market share hasn't actually changed much, said Hou.

Baidu Goes App

Not all of the recent uptrend has been hype, Hou said. Baidu has jumped since it agreed July 15 to pay $1.9 billion for app store 91 Wireless Websoft. But that makes it one of the few Chinese Internets that is seeing an actual business change, she said.

"The market consolidation has given you a new level for value for this stock," said analyst Hou.

Baidu has a "slight leg up" vs. some of the other stocks, but "from the macro perspective, I'm not excited about the Chinese Internet sector," says Wey.

Sohu's Q2 revenue rose 32.5% to $338.9 million. That missed views for $340.3 million, according to Thomson Reuters.

Changyou sales grew 27% to $182.4 million, just shy of analyst forecasts for $183.4 million. For the current quarter, Sohu guided Q3 EPS forecasts lower while Changyou gave a weak outlook for the top and bottom lines.

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