Sohu Setback Slams Other Chinese Net Stocks

Sina and Netease also sink as some investor favorites backtrack.
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Chinese Internet stocks sagged Tuesday after Sohu.com (SOHU) - Get Report disappointed investors with a soft growth forecast.

The Chinese Internet portal, whose shares are followed by only one major sell-side analyst in the U.S., failed to meet that analyst's targets for the fourth quarter. The analyst, Safa Rashtchy of Piper Jaffray, cut his 2004 estimates and his price target for the company, which he still rates outperform.

The disappointment sent Sohu.com's shares down as much as 23% Tuesday, and to a lesser extent knocked down the shares of its fellow Chinese Internet portals,

Sina

(SINA) - Get Report

-- slated to report Tuesday night -- and

NetEase.com

(NTES) - Get Report

.

But even as Sohu.com's stock was trading at $30.87 Tuesday afternoon, down $7.04 for the day, it was still more than 400% above its 52-week low.

The stock's upsurge in the first half of the year and its volatility since then reflect the ongoing debate about Sohu.com and other Chinese Net stocks.

Their supporters say that the shares represent an opportunity to get a piece of the inevitable growth of the Internet economy in China. As Sohu.com CEO Charles Zhang put it on a conference call with analysts Monday evening, "We believe Sohu is the best-positioned company to capture the growth opportunity of the Internet in China."

But doubters wonder whether Chinese Internet and wireless data services growth will be as fast and profitable as hoped, and whether stocks will collapse as they did in the U.S.' dot-com bust. In line with the outsized stock appreciation over the past year, each new piece of evidence -- be it Tuesday's disappointment or

Sina's mid-January deal to launch an auction site with

Yahoo!

(YHOO)

-- can easily spark a double-digit percentage price change in the relevant company's stock.

For the fourth quarter ended Dec. 31, Sohu.com earned 28 cents a share on revenue of $24.6 million. While the EPS number matched Rashtchy's estimate, revenue fell short of his $25.7 million estimate, a result of lower-than-expected short messaging service, or SMS, revenue from wireless telephone users.

Rashtchy cut his 2004 revenue estimate from $130 million to $118.6 million, and his EPS estimate from $1.40 to $1.25.

Those cuts, writes Rashtchy, reflect the company's guidance for the first quarter of 2004, as well as a his conservative estimate of Sohu.com's SMS business, which amounted to 61% of the latest quarter's revenue.

The analyst's price target went from $44 to $41. Piper Jaffray hasn't done any recent banking or underwriting for Sohu.com.

Sohu.com told analysts that operating expenses in the first quarter would probably increase 15% from the fourth, as a result of acquisitions, new product investments and development of its online gaming business.

The company also said it believed that multimedia messaging services will take off in the second half of 2004 as MMS-enabled phones come into the market.

Addressing another concern of investors -- that wireless carriers

China Mobile

(CHL) - Get Report

and

China Unicom

(CHU) - Get Report

will take an increasing cut of the revenue that Sohu.com reaps from wireless users -- Zhang told analysts, "I do not anticipate any significant changes" in the revenue-sharing agreements.