INTERNET: Sohu Slide Continues, Time to Sell?

Bottom line: Sohu founder Charles Zhang should privatize his company in the next year and then sell off the pieces, or risk see his dwindling empire slowly become worthless.

Sohu’s incredible shrinking empire

You know you’re a CEO when you can call results like those just released by Internet company Sohu (Nasdaq: SOHU) “solid”. Of course that’s my sarcastic assessment, after reading the latest quarterly report that absolutely nothing upbeat about it from one of China’s oldest Internet companies. Nearly all of the numbers in Sohu’s latest report were down, with the lone exception of its online search business, whose anemic growth shouldn’t excite anyone.

Also down was Sohu’s stock, which slumped 6.4 percent after the results came out and is rapidly approaching lows not seen for nearly a decade. All that brings us to my assertion that perhaps it’s time for founder Charles Zhang to consider the unthinkable and break up his company and sell of the various pieces while there are still potential buyers. If he waits too much longer, those pieces will continue to diminish in value to the point where nobody wants them.

I’ve written similar things before about this company, which, among China’s three earliest Internet names, has been the most disappointing in realizing its potential. The most successful of that trio, NetEase (Nasdaq: NTES), has carved out a nice niche as China’s second largest online game company. The trio’s other member, Sina (Nasdaq: SINA), is still a powerhouse in online news, and has scored a modest hit with its Twitter-like Weibo (Nasdaq: WB) social networking service.

And then there’s Sohu, which has become a model for mediocrity in its four core areas of online news, games, video and search. None of those looks stellar in its latest quarterly report, which starts with the headline figure saying the company’s revenue fell 8 percent to $374 million. (company announcement) Within that figure, Sohu’s brand advertising business plunged 35 percent, and gaming revenue dropped 17 percent.

As I said above, the only unit that posted any growth was its online search, which managed an anemic 10 percent gain. But Sohu notes that figure was down 5 percent from the previous quarter, and we should note that the total figure of $162 million is still just a tiny fraction of quarterly revenues for industry leader Baidu (Nasdaq: BIDU), which top $2 billion.

There’s no mention of revenues for the company’s other big business in video, but the few references to that business don’t look too encouraging. One of those says revenue from the video business decreased, and that content costs for the unit continued to grow. But perhaps most worrisome is a note in the “safe harbor” section ending the announcement, where Sohu raises the possibility that it won’t be able to “recoup its investment in video content.”

Rounding out the report is Sohu’s announcement that it sunk into the loss column for the quarter, reporting an operating loss of $47 million versus a profit of $15 million a year earlier.

Solid Start?

Against all that gloomy backdrop, it does seem somewhat striking that Zhang would open the announcement by saying “We are off (to) a solid start in 2017.” He does go on to qualify his statement by noting that the results were “in line”, presumably with whatever he said before. But just because you predict weak results in the past and manage to meet that poor standard isn’t anything to really get excited about. Perhaps one slightly encouraging sign is that Sohu thinks its revenue declines may start to stabilize in the current quarter, at least based on its Q2 revenue forecast.

All that brings us back to my assertion at the outset of this post, namely that Zhang should seriously consider breaking up his empire and selling off its various pieces while he still can. The most logical way to start would be to privatize Sohu, and then quietly dismantle the company behind the scenes.

Such a buyout would probably be relatively easy to complete at this point, since the company now has a modest market cap of $1.5 billion and there is still plenty of private equity money floating around willing to finance such a move. Zhang is a notoriously stubborn person who wants to run his own show, which has made similar buyouts difficult in the past. But he’s also getting older and perhaps wiser, meaning maybe there’s a chance he will finally see the writing on the wall and start thinking seriously about an exit for his company.

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