Is Sohu a Worthwhile Investment?

With shares of Sohu (NASDAQ:SOHU) trading around $63, is SOHU an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Sohu is a Chinese online media, search, gaming, community, and mobile service group. The company operates several types of of Chinese language Web properties, and it also operates multi-player online games and Web-based games in China. The company’s businesses consist of online advertising, online gaming, wireless services, and related products. As Chinese consumers continue to adopt online technologies in increasing numbers, large internet companies like Sohu stand to see impressive growth.

Recently, Sohu posted a profit that beat Wall Street’s expectations, but the company missed revenue expectations. The revenue miss is definitely not positive news for investors, who are seeking high growth from the company. Look for Sohu to try to step it up this quarter, through increased advertising efforts.

T = Technicals on the Stock Chart are Strong

Sohu stock has been on an explosive run over the last several months. The stock is now taking a breather after an impressive run so it may need some time at these prices. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Sohu is trading at key averages, which signals neutral to bullish price action in the near-term.

SOHU

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Sohu options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Sohu Options

44.86%

33%

30%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Sohu’s stock.

E = Earnings Are Improving Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. In addition, reactions to the last four quarterly earnings announcements can help gauge investor sentiment on Sohu’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Sohu look like, and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

107.14%

13.21%

-5.02%

-46.15%

Revenue Growth (Y-O-Y)

32.52%

35.74%

21.67%

22.55%

Earnings Reaction

-10.01%*

-0.21%

-5.54%

1.27%

Sohu has seen improving earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have expected a little more from Sohu’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Sohu stock done relative to its peers, NetEase (NASDAQ:NTES), Baidu (NASDAQ:BIDU), Sina (NASDAQ:SINA), and sector?

Sohu

NetEase

Baidu

Sina

Sector

Year-to-Date Return

33.57%

50.44%

28.62%

32.18%

29.84%

Sohu has been an average relative performer, year-to-date.

Conclusion

Sohu is an online media company that operates in China. The company recently reported earnings that did not sit well with investors. Now, the stock is trading in a range, after seeing an explosive move higher. Over the last four quarters, earnings have been improving, while revenues have been rising. Relative to its peers and sector, Sohu has been an average year-to-date performer. WAIT AND SEE what Sohu does this coming quarter.

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