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Why Sohu.com (SOHU) Was Downgraded

Updated at 9:40 a.m. to reflect market activity.

NEW YORK (TheStreet) -- Sohu.com (SOHU - Get Report) was upgraded to "underweight" from "equal weight" by Morgan Stanley Tuesday.

Sohu.com fell 3%to $69.40 in morning trading.

The bank set a price target of $57.60 for the Internet company. Analysts note that Sohu.com is in a transitional period, and could see lower margins as a result.

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Separately, TheStreet Ratings team rates SOHU.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate SOHU.COM INC (SOHU) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 16.7%. Since the same quarter one year prior, revenues rose by 29.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Although SOHU's debt-to-equity ratio of 0.27 is very low, it is currently higher than that of the industry average. To add to this, SOHU has a quick ratio of 1.84, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for SOHU.COM INC is currently very high, coming in at 75.50%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -17.42% is in-line with the industry average.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Internet Software & Services industry and the overall market, SOHU.COM INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to $123.66 million or 14.25% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • You can view the full analysis from the report here: SOHU Ratings Report
 

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