Sohu.com’s (SOHU) gaming subsidiary Changyou.com (CYOU) recently agreed to buy 51.0% of the equity interests in mobile technology developer MoboTap for $91.0 million. The company will purchase a zero-coupon convertible bond for $30.0 million due in five years, which, if converted, will increase its stake to 60.0%.
MoboTap develops Dolphin Browser, a popular free mobile browser for Apple’s (AAPL) iOS and Google’s (GOOGL) Android operating systems. The company has more than 100 million users with majority based in the U.S. and Europe. The investment is expected to boost Sohu’s presence in the mobile browser market.
Sohu is expanding its mobile operations through continued investments in products and technology. In the first quarter of 2014, mobile video traffic surpassed PC traffic. Mobile search revenues contributed 12% of total search revenue. Mobile traffic showed stronger momentum and exceeded PC during the reported quarter.
We believe that Sohu’s innovative product pipeline and strong traffic growth in the search, online video and mobile businesses will drive top-line growth in the long run. Moreover, strong growth potential exists in the online gaming business. Additionally, the partnership with Tencent will boost Sogou’s traffic, which will further drive Sohu’s top line, going forward.
Further, with continued organic growth and the support of Tencent's vast online properties, Sogou's market share in PC and mobile search is expected to expand over time. However, we believe that there is still substantial room for Sogou to improve its search monetization capability.
However, Sohu is a relatively small player in the online advertising market and continuing investments in product development are necessary to expand its market share. This will keep margins under pressure in the near term but strengthen the long-term competitiveness of the company in China.
Despite higher spending, we believe that market share gain will be difficult in the near term due to stiff competition.
Currently, Sohu has a Zacks Rank #4 (Sell).