IPOs: Sohu Shops Tired Sougou For 2015 IPO
Bottom line: Sogou is likely to list in the second half of the year, but will get a lukewarm reception from investors due to its status as a solid second-tier player without hopes of ever becoming a sector leader.
Some 3 months into the New Year, we’re still waiting for the first New York IPO by a Chinese Internet company after a blockbuster year in 2014. Now we’re getting word of a listing that could come in the second half, with news that portal stalwart Sohu (Nasdaq: SOHU) is planning an IPO for its decade-old Sougou search engine in that time frame.
The offering looks very so-so, as Sougou has failed to gain much traction despite its status as one of China’s oldest search players. More broadly speaking, we can probably expect to see more of this kind of ho-hum IPO from second-tier Chinese Internet firms for the rest of the year, since the most exciting players listed during last year’s surge in new offerings.
The deal being pursued by Sogou would value the company at about $3 billion, which looks about right for a company of that size and may even be a bit rich if Sogou is still losing money. (English article; Chinese article) According to the reports, Sougou’s revenue rose 70 percent in the fourth quarter of last year to $119 million.
That number may look ok, but it’s actually slowing down from the doubling revenue rates Sogou was posting not long ago. What’s more, the $119 million is just a tiny 5 percent of the $2.26 billion in fourth-quarter revenue posted Internet search leader Baidu (Nasdaq: BIDU), showing that Sogou still isn’t very good at monetizing its search service. That’s quite significant since the company has been in the business for quite a while, unlike the newer and fast-rising search service Haosou operated Qihoo 360 (NYSE: QIHU).
Data compiled by Bloomberg showed that Sogou had about 7 percent of the Chinese search market in the fourth quarter based on number of queries, a far cry from Baidu’s 74 percent and Qihoo’s 17 percent. Other metrics show Sogou’s market share could be a bit higher, as much as 13 percent, though the figure is probably closer to the 7 percent level.
Sogou’s performance is all the more disappointing because it got a big boost nearly 2 years ago when it combined with the search service operated by social networking giant Tencent (HKEx: 700). Sogou has done little to leverage that relationship since the merger, though earlier this year it did make a move in that direction when it launched a news app that took advantage of its Tencent links. (previous post)
None of this should surprise Sohu watchers, as this company has a track record as a very solid second-tier company that can’t seem to make it to the big leagues. Sohu was one of China’s earliest web portals, but has never been able to match the clout of larger rival Sina (Nasdaq: SINA). Likewise, the company’s Changyou (Nasdaq: CYOU) unit is a firm second-tier player in the online gaming space, and it also operates an online video unit that is also a squarely second-tier rival to bigger names like LeTV (Shenzhen: 300104, Youku Tudou (NYSE: YOKU) and Baidu’s iQiyi.
Of course not everyone can be an industry leader, and even companies that start off strong often lose their momentum eventually. But in this case Sogou really has had many advantages and chances to prove itself, but has constantly left the market disappointed at its lackluster performance.
Moving back to the bigger IPO story, I doubt Sogou will be this year’s first Chinese Internet IPO, which should probably come in April or May at the latest. It previously looked like group buying site 55Tuan might get the honors for that distinction, though the company’s previous $65 million listing plan has gone missing recently for unexplained reasons. (previous post) Sogou is more likely to be the third or fourth listing of the year if it actually makes it to market, which looks like a relatively strong possibility. But when it finally makes its debut, look for a lukewarm reception for a company that’s probably destined to forever remain an unexciting second-tier player.
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