Sohu.com Inc. (SOHU) is a leading online brand in China. The company reported blockbuster financial results for the first quarter of 2008. Both the company's revenue and earnings were significantly higher than market expectations because of strong growth in online games.
Gross margin of 76% in the first quarter of 2008 increased from 71% in the previous quarter. Online game revenues were US$41.0 million, up 24 times year-over-year and 71% quarter-over-quarter. In addition, brand advertising revenues were US$33.2 million, up 41% year-over-year and 3% quarter-over-quarter.
Although the company faces fierce competition from different fields - including brand advertising, online game, wireless value added services, and search - the company manages to be a main player in almost each field. We believe SOHU should show strong growth momentum in the next few quarters.
With the Beijing 2008 Olympics sponsorship, SOHU has a well-known brand and rich website resources to leverage the great opportunities for online business in China. Overall, we think the current stock price is undervalued. Therefore, we are maintaining a Buy rating on SOHU shares.
The stock is trading at 28.6x our 2008 EPS estimate, which is lower than the industry mean. The stock is also trading at 23.3x our 2009 EPS estimate, which is far lower than the industry mean. Using a P/E multiple of 26.2x our fiscal year 2009 earnings per share estimate of $3.25 yields a target price of $85.00, which we believe reflects the company's growth prospects.
Read the full analyst report on SOHU
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