What’s with Sohu? - InvestingChannel

What’s with Sohu?

Chinese stocks took it on the chin lately.

Except for Sohu (SOHU).

The Chinese online advertising, search, media, and gaming service popped more than 27% yesterday.

TrackstarIQ picked up on the increased interest immediately.

So what caused the stock to shoot up like a rocket?

It took a little bit of digging, but we found the goods.

Sohu gets a major payout

A year ago, Tencent offered to buy the rest of a combined 60.8% stake in Sogou Inc., the Chinese search engine at $9 per share.

Two months later, Sohu announced it would receive about $1.18 billion in cash from the deal.

Chinese regulators said ‘not so fast.’

The deal was expected to close in late 2020.

Only yesterday did news break that regulators gave the green light.

That means Sohu gets the +$1 billion payout…

A payout currently worth more than the entire market cap of Sohu!

With 40 million shares outstanding, that’s equivalent to $29.50 per share.

And shares currently trade at $23.

More value than you realize

Let’s put this in perspective.

Shares currently trade at a discount of 28.2%.

That’s just for the payout and says nothing about Sohu’s earnings potential.

To be fair, the company has yet to post positive earnings on an annual basis. They do every so often on a quarterly basis.

In fact, they’ve done so the last two quarters.

And current estimates suggest the company is trading at 12.3x this year’s earnings and 18.6x next year’s.

Keep in mind that investors tend to discount Chinese companies relative to their U.S. counterparts.

But what the market is saying here is that the current business is worth -$6.50 a share.

Growth last year jumped 11.2% after a decline of a bit more than 2% in 2019. Most of that growth came from gaming.

So the real question is whether the company can continue to drive topline growth while maintaining cost controls.

Our hot take

Even after the jump in shares, there is a ton of potential here.

Sohu carries less risk of running afoul with Chinese regulators since data transfer to foreign nations isn’t an issue.

The real question is whether they can deliver revenue growth.

In its heyday, the stock traded over $100 a share back in 2011. 

Since then, it’s been on a slow bleed for the better part of a decade.

Value investors argue the share price is worth more based on intrinsic worth.

However, markets look into the future. And without growth prospects and a clear plan, Sohu will struggle to break much higher.

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