Investors dumped shares of Sohu.com (SOHU.O) Friday after Reuters suggested that the company will face tough comps following declining ad revenues after the Olympics. Citi thinks that this has created an attractive entry point and that online gaming will continue to power above-trend growth:
The sell-off was sparked by a Reuters article confirming what almost everyone already knew: Sohu will face challenging YoY comps on its brand adv side due to a post-Olympics “hangover” effect. However, we believe online gaming will continue to power rev and earnings growth in 2009. We were modelling +18% YoY for 2009 adv revs, so the company’s expectations of “+20-30% YoY” is actually stronger than our estimates. Finally, we note that online gaming is highly immune from growing inflationary pressures in China, another positive.
Citi is also upbeat on Sohu’s ability to profit from its recently-granted exclusive rights to stream Olympic events live:
We believe both Adv & Gaming are having a strong quarter, and should come in above company guidance. 3Q is also set to be very strong, especially with Olympics adv, which should benefit from Sohu recently being granted the rights to show live streaming video of all events. As explained below, Sohu is easily one of the, if not the, fundamentally best positioned names for at least the next 2 quarters.
Finally, Citi thinks that the recent earthquake in Sichuan province didn’t seriously affect the company:
With the exception of the 3 days of official mourning, we believe Sohu’s online adv has not seen a negative impact. Not surprisingly, as the Official Online Sponsor of the Olympics, Sohu is benefiting
from “strategic Olympic-related” demand, which is less vulnerable to near-term events, even those as tragic and disruptive as the earthquakes. In fact, we believe some verticals, such as real estate and online gaming, have been stronger after the earthquakes than they were tracking before.
Citi reiterates its Buy/Low Risk rating and ups its target from $80 to $90. FY2009 EPS is upped from $3.24 to $3.60.
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