Why These China-Based Stocks Bombed Today

NEW YORK (TheStreet) -- Sohu.com (SOHU), Changyou.com (CYOU) and NQ Mobile (NQ), three China-based, U.S.-listed stocks, bombed in Monday trading.

Sohu.com Inc

Internet search and gaming group Sohu.com issued mixed earnings and guidance before the bell Monday, sending shares tumbling. The Beijing-based company reported third-quarter earnings of 51 cents a share on revenue of $368 million, up 29% from the year-ago period.

For the fourth quarter, Sohu anticipates revenue of between $378 million and $390 million, higher than expectations of $369.9 million according to analysts surveyed by Yahoo! Finance. Earnings are anticipated between 30 cents to 35 cents, lower than the consensus estimate of 48 cents.

By close, shares had dropped 16.4% to $68.11, and 6.8 million shares had changed hands compared to its three-month average daily trading volume of 1.9 million.

TheStreet Ratings team rates Sohu.com Inc as a Buy with a ratings score of B. The team has this to say about their recommendation:

"We rate Sohu.com Inc (SOHU) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. 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, reasonable valuation levels, solid stock price performance and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Changyou.com

Changyou.com, a former branch of Sohu, also reported mixed third-quarter earnings. The online game developer reported earnings of $1.37 a share on revenue of $183.1 million. Analysts surveyed by Yahoo! Finance had expected earnings of $1.36 on $183.35 million in revenue.

For the fourth quarter, the company reported an unexpectedly gloomy forecast of between 34 cents to 41 cents, compared to analysts' consensus of $1.39 a share. Revenue was higher than hoped for, in the range of $193 million to $199 million compared to analyst expectations of $190.25 million.

"In the fourth quarter, we will significantly ramp up our marketing investment to promote our line-up of new games, mobile applications and other Internet products in both China and overseas, so as to further expand our user base," said CFO Alex Ho in a statement. Significantly more expensive investments in the quarter could explain the earnings shortfall.

Shares were 20.2% lower to $28.50 by market close, and 2.7 million shares had changed hands compared to the three-month average daily trading volume of 337,300.

TheStreet Ratings team rates Changyou.com LTD as a Buy with a ratings score of B. The team has this to say about their recommendation:

"We rate Changyou.com LTD (CYOU) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, growth in earnings per share, attractive valuation levels and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

NQ Mobile

Adding to last week's losses, NQ Mobile plunged 17.2% to $8.80 on Monday. The mobile services provider has amassed massive losses since Thursday, dropping a total 61% after warnings from investment firm Muddy Waters Research.

Muddy Waters initiated a "strong sell" rating, calling the company a "massive fraud". Among the short-seller firm's claims, it alleged NQ had doctored figures pertaining to market share, number of customers and value of assets.

The company has since attempted to dispute what it calls "false allegations" by making its financial position transparent. In a conference on Friday morning, NQ Mobile said it had commissioned an independent special committee to conduct a review of Muddy Waters' allegations. In the meantime, management issued details of the major term deposits in cash it currently has on hand.  

TheStreet Ratings team rates NQ Mobile Inc as a Hold with a ratings score of C+. The team has this to say about their recommendation:

"We rate NQ Mobile Inc -ADR (NQ) 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 solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share."

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

  • NQ's very impressive revenue growth greatly exceeded the industry average of 7.9%. Since the same quarter one year prior, revenues leaped by 107.4%. 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.
  • NQ has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 4.70, which clearly demonstrates the ability to cover short-term cash needs.
  • Compared to its closing price of one year ago, NQ's share price has jumped by 63.82%, exceeding the performance of the broader market during that same time frame. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Software industry. The net income has decreased by 8.3% when compared to the same quarter one year ago, dropping from $2.08 million to $1.91 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Software industry and the overall market, NQ MOBILE INC -ADR's return on equity is significantly below that of the industry average and is below that of the S&P 500.
  • You can view the full analysis from the report here: NQ Ratings Report

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