Investors Tire Of Sohu, Shanda Game Talk
Investors are taking a decidedly negative view on the latest news from web portal Sohu (Nasdaq: SOHU) and game operator Shanda Games (Nasdaq: GAME), in a wave of buyer fatigue following recent rallies for these 2 Internet companies. Shares of both companies lost 10 percent or more in the latest trading day in New York, after Sohu released a very solid set of financial results and Shanda announced an acquisition that should help to boost its struggling core game business. In all fairness, both companies’ shares have rallied sharply this year for different reasons, so some might view this sell-off as a classic case of the “buy on the rumor, sell on the news” mentality. As such, the setback may be a one-time correction, and different factors will determine whether the companies resume their rallies in the weeks ahead.
Let’s start off with Sohu, whose shares have doubled this year on a nonstop string of rumors about deals involving its various units. Most of the talk has centered on a partial or complete sale of Sohu’s Sogou search engine, which is finally starting to gain some traction after years of lackluster results.
Sogou was just one of several highlights in Sohu’s second-quarter earnings report, with revenue from the search engine rising 64 percent to $50 million during the quarter. (company announcement) Sohu further forecast that Sogou revenues would rise another 45-50 percent year-on-year to about $55 million in the current quarter, continuing the strong growth. The company’s overall profit and revenue also grew a healthy 100 percent and 33 percent for the quarter, beating analyst forecasts.
And yet despite those strong numbers, Sohu’s shares tumbled 10 percent after the report came out. I suspect that investors were trying to lock in profits from the stock’s sharp gains this year. Perhaps they’re also losing some patience with company founder Charles Zhang, amid nonstop reports that Sohuis close to a deal to sell Sogou, only to see such a deal fail to ever materialize.
From Sohu, let’s move quickly to Shanda Games, a pioneer in China’s online game sector that has become a laggard since its 2009 IPO. The company’s shares have moved steadily downward since that listing 4 years ago amid slowing growth and stiff competition in the sector. Even after a rally early this year, the shares still trade at less than half their IPO price.
The bears were back in control during the latest trading day on Wall Street, with Shanda Games shares plunging 20 percent after it announced a major purchase of assets from its parent. (company announcement; Chinese article) That deal will see Shanda Games pay $812 million to Shanda Interactive for sister companies that provide it with payment and platform services. The deal looks quite logical since Shanda Games does big business with these 2 companies, and pays them about a fifth of its revenues for their services.
Perhaps investors were partly scared off by the big price tag for the purchase, which is about half the amount of Shanda’s total market cap. Shanda Game now has a market value of about $1.6 billion. So assuming these 2 companies get about half of their revenue from Shanda Game, then the $800 million figure looks like a relatively fair price. As I’ve said above, the sell-off after the deal announcement could also just come from investors trying to lock in gains from a rally that saw the shares nearly double from lows earlier this year.
Shares of both Sohu and Shanda Games could return to their rallies following this temporary sell-off, though other factors will also determine whether the downturns continue. For Sohu, I really do think the company will have to announce a Sogou deal soon if it wants to sustain its share rally. Failure to clinch such a deal after so much anticipation would weigh heavily on its shares in 2014. For Shanda Games, the company will need to show some quick improvement in its results from the new acquisitions, which looks likely since it should sharpy reduce its expenses.
Bottom line: Sohu shares will come under pressure until it reaches a strategic sale or tie-up for Sogou, while Shanda Games shares could rally following its new acquisition.
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