IPOs: Sogou Makes It to Market, But Will It Sell?

Bottom line: Sogou is unlikely to shed its position as a second-tier search engine anytime soon, despite its ties to Tencent ties, and its stock is also unlikely to be a strong performer over the next 2-3 years.

After writing about up-and-coming hot new names like Qudian (NYSE: QD) and ZhongAn Insurance (HKEx: 6060) making blockbuster IPOs over these last few weeks, it feels a bit like going back to the future by writing today about a new listing for search engine Sogou (NYSE: SOGO). The fact of the matter is that Qudian, ZhongAn and just about all of the companies listing in this current wave of IPOs didn’t even exist when Sogou was born, and many of their founders were probably still in college or perhaps younger.

Anyone out there sensing just a tiny bit of skepticism from what I’ve just written isn’t just imagining things. As a longtime China tech reporter, I remember meeting with Charles Zhang, founder of Sogou’s parent Sohu (Nasdaq: SOHU), more than a decade ago, at which time he told me about all the great things in store for his then-fledgling search engine. Fast forward to the present, when it doesn’t seem like much has changed, including Sogou’s ongoing status as a niche player in China’s massive search market.

All that said, at least someone seems to like Sogou, at least based on its IPO performance. I suspect much of that is due to the company’s partial ownership by Internet giant Tencent (HKEx: 700). That fact is more due to historical reasons than anything else, as the current Sogou was formed a few years back when Tencent rolled its own marginal search business into Sogou. But nobody should be fooled about Tencent’s role, as this current Sogou is firmly in control of Sohu, itself a permanent second-tier Internet player that hasn’t excited anyone for a long time.

Let’s look quickly at the IPO to see what happened, before moving on to what’s ahead for this so-so company called Sogou. On paper everything certainly looks good. The company’s American Depositary Shares (ADSs) priced at $13 apiece, representing the top of their range. That helped Sogou to raise $585 million, not a small amount even in today’s frothy market, and valued the company at nearly $6 billion. (English article) The shares then jumped as much as much as 13 percent when trading began, before settling down to close up a more modest 4 percent.

At least on paper, Sogou, by its own account looks like a strong alternative to search leader Baidu (Nasdaq: BIDU). The company says it has about 483 mobile monthly active users, compared with about 665 million for Baidu, according to its prospectus. The company posted $66.7 million in profit for the first nine months of the year, up 47% from a year earlier. While that number may look ok, it pales in comparison to Baidu’s $1.2 billion in profit for the third-quarter alone, which should raise a few eyebrows.

Market Share Gap

A look at some independent media reports also paints quite a different picture for these two companies in terms of market share. The one I looked at, which is from April this year, says that Baidu controlled 76 percent of the China search market for that month. It was followed by a company called Shenma, which I’m unfamiliar with, but which had about 9 percent of the market. Third was Qihoo 360’s So.com with 8 percent. Sogou finally shows up on the list in fourth place with a meager 3 percent.

I’m not sure why there’s such a huge discrepancy with those numbers and Sogou’s own figures for its traffic. But the huge profit differential alone should be enough to raise some eyebrows from investors. If Sogou was a new company like many of these others just going public, that would be one thing. But we’re talking a company that has had 12 years to perfect its act, including monetization of its service. If 12 years can only produce $67 million in profits, that’s honestly not much to show, especially when you have all the advantages of having Tencent as your partner.

Perhaps some are banking on Tencent’s support, which has Sogou being added into its popular mobile messaging platforms that collectively boast more than 1 billion users. I suspect that’s a large reason for the Sogou’s big user numbers, since many of those users might accidentally use the service by default without realizing it. Whatever the case, I personally can’t get too excited about this company, and expect it will remain a clear second-tier player in the China search market for the foreseeable future.