Why Is Sohu.com (SOHU) Down 6.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Sohu.com (SOHU). Shares have lost about 6.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sohu.com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Sohu.com Q3 Earnings Beat Estimates, Revenues Up Y/Y

Sohu.com reported third-quarter 2021 adjusted earnings of 44 cents per share, which beat the Zacks Consensus Estimate by a wide margin of 633.3%. The company had reported a loss of 17 cents per share in the year-ago quarter.

Revenues increased 37% year over year to $216.1 million.

Top Line Details

In the third quarter, Brand advertising revenues decreased 18% year over year to $33.7 million, primarily due to lower portal advertising revenues.

Online game revenues of $166.8 million jumped 64.6% year over year, driven by strong demand for TLBB Vintage. The launch of Little Raccoon: Heroes in the third quarter also benefited Sohu.

For PC games, total average monthly active user (MAU) accounts were 2 million, up 3% year over year. Total quarterly aggregate active paying accounts (“APA”) were 1 million, up 4% year over year.

For mobile games, total average MAU were 4.6 million, up 22% year over year. Total quarterly APA was 1 million, up 55% year over year.

Other revenues decreased 4.3% year on year to $15.6 million.

Operating Details

Non-GAAP gross margin in third-quarter 2021 increased to 74% from 66% reported in the year-ago quarter.

Brand advertising business margin decreased to 29% from the year-ago quarter’s 31%. Online games’ non-GAAP gross margin was 83%, up from the year-ago quarter’s 80%.

Non-GAAP operating expenses were $131.9 million, up 20.5% year over year due to higher marketing expenses, as well as salary and benefits expenses.

Sohu’s non-GAAP operating profit was $27.5 million, against the year-ago quarter’s loss of $4.8 million.

Balance Sheet

As of Sep 30, 2021, Sohu’s cash and cash equivalents (including restricted cash and short-term investments) came in at $1.58 billion compared with $874.4 million as of Jun 30, 2021.

Q4 Guidance

For fourth-quarter 2021, Brand advertising revenues are anticipated in the range of $28-$31 million, down 26% to 33% on a year-over-year basis.

Online game revenues are expected in the band of $140-$150 million, which indicates a year-over-year decrease of 23-29%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -710% due to these changes.

VGM Scores

At this time, Sohu.com has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Sohu.com has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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