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Sohu.com is the sole Internet sponsor of the 2008 Beijing Games, potentially putting its investors in line for gold. But a rich valuation and the risk of irrational Olympic exuberance make for tricky timing on when to get in and out of the Chinese Web portal.
Sometimes called the Yahoo (YHOO, news, msgs) of China, Sohu.com (SOHU, news, msgs) is that country's No. 2 portal after Sina Corp. (SINA, news, msgs). It offers the usual fare of news, sports and weather, as well as TV-like programs through partnerships with the National Basketball Association and China Interactive Sports.
The company has a search engine and online games but derives more than half of its top line from nonsearch advertising sales. Total revenue grew 28% last year to $134 million, of which $79 million came from brand advertising. Market researcher iResearch expects China's nonsearch ad market to grow nearly 40% a year through 2011, so clearly that's a nice business to be in.
And then, of course, there are the astounding long-term fundamentals underpinning all Chinese Internet stocks, including Baidu.com (BIDU, news, msgs), known as the Chinese Google (GOOG, news, msgs), and Netease.com (NTES, news, msgs). China is second only to the U.S. in number of Internet users at roughly 160 million. That represents only a little more than 10% of a total population that's rapidly going online. Meanwhile, only about 5% of total Chinese ad spending is currently directed to the Web.
It all adds up to a rosy picture, says James Lee, an analyst with W.R. Hambrecht, who rates Sohu as a "buy." "As for longer-term growth, right now we're only in the first inning. The fundamentals are very positive," Lee says.
A $30 million bet
What separates Sohu from the pack right now is that the company paid an estimated $30 million to be the official Internet sponsor of the 2008 Beijing Olympics. As such, Sohu has a number of marketing and traffic advantages.The company operates the games' official Web site, making it a key destination for tens of millions of Chinese fans. Meanwhile, in a marketing coup, local Olympics sponsors such as Air China and Adidas may use the official Beijing Olympics "running man" logo only in conjunction with their corporate logos in ads on Sohu. And when it comes to traffic-driving content, Sohu has access to more press passes, giving it a reporting advantage at getting more news out more quickly.
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"It's the first time China has hosted the Olympics, and we think that's going to be a huge boon," says Darren Chervitz, the director of research at Jacob Asset Management, whose Jacob Internet Fund (JAMFX) holds a stake in the company. Sohu is uniquely positioned to cash in, Chervitz adds, but he cautions that things are starting to get a little speculative.
After all, the robust long-term fundamentals for Chinese Internet stocks are no secret. Baidu is up roughly 180% year to date, while Sina has gained more than 70%. Sohu shares have also added 80% to top $40, helped largely by the runaway success of "Tian Long Ba Bu," or TLBB, a massive, multiplayer online role-playing game launched in May.
Continued: Long-term value 'phenomenal'
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