Sohu.com's ( SOHU)
disappointing outlook Monday heralded a retreat among Chinese Internet and wireless content stocks. Shares in Sohu.com fell as much as 14% Monday, and other Chinese new media stocks fell as well, led by Sina ( SINA), NetEase.com ( NTES), Tom Online ( TOMO) and Shanda Interactive ( SNDA). Sohu.com, which gains most of its revenue these days from online advertising, forecast first-quarter sales in the range of $22.5 million to $23.5 million, short of the Thomson First call expectations of $25 million. The company also forecast earnings per share of 14 cents to 16 cents, below the First Call number of 17 cents. Sohu.com's outlook calls for sequential growth in ad revenue but flatness in its nonadvertising business comprising wireless value-added services, online games and e-commerce. The company's wireless business fell off a cliff last year upon China Mobile's ( CHL) initiation of a one-year suspension in some of Sohu.com's wireless business for violations of China Mobile's operational guidelines. China Mobile also insisted Sohu.com make price cuts in other services. Monday's numbers illustrate some of the fundamental challenges for investors in Chinese new-media content companies. While the size of China's population and the prevalence of wireless phones holds out the promise of Google ( GOOG)-like growth, the relevant companies aren't necessarily able to come through on that growth as quickly as investors might hope. In addition, investors have to contend with the fact that business rules are different in China. That one-year suspension for Sohu.com, after all, was punishment for the company's sending out an unauthorized marketing message to 1,374 customers that resulted in 23 subscriptions to a service costing $1.20. It seems unlikely that a punishment as draconian as what Sohu.com suffered -- it said at the time that wireless revenue would be cut $1.5 million to $1.8 million in the third quarter of 2003 alone -- would be enforced by a U.S. wireless carrier in response to any similar policy violation by a content provider.
Looking on the bright side of Sohu.com's results and outlook, Piper Jaffray analyst Safa Rashtchy indicated Monday that he believed things can't get worse for the company. The fourth quarter was the first in 2004 that Sohu.com didn't miss expectations, Rashtchy wrote in a Monday note. While first-quarter 2005 guidance was below his estimates, wrote Rashtchy, he had been expecting he would lower estimates given a weaker-than-forecast ad market in China. "We believe Sohu's issues, particularly in wireless, have now hit a bottom and we will see improvements from this point on," wrote Rashtchy. "Sohu has been discounted back to reflect a very weak performance and slow growth. We believe the picture is not getting worse anymore. There is no reason, in our opinion, for the stock to go further down as all of these issues are already in the stock and we believe we have seen the worst already." Rashtchy has a market perform rating on Sohu.com. Giving investors another set of data to consider, Sina is slated to report numbers after the markets close Monday evening. Analysts expect revenue of $55 million, and revenue of 31 cents. But even good results have been of limited appeal of late in China. Online-game firm Shanda -- shares in which have zoomed from $10.58 to as high as $45.40 over the past year -- beat expectations in its results released after the market closed Thursday. But shares fell 2% on Friday, and were down more than 3% Monday. Shares in Sohu.com traded at $15.37 Monday afternoon, down $1.85, or nearly 11%.