August 31, 2016

SOHU.com Is Undervalued By Almost Any Calculation


Summary

  • At $38.73 per share, SOHU’s Adjusted ROA of 16.2% and Adjusted P/B of 0.8x drive an Adjusted P/E of 7.0x, making it an interesting deep value idea given its fundamentals.
  • Due to the uncertain macroeconomic state of China, as well as the firm’s declining profitability and failure to expand to mobile gaming, the market believes the firm is nearly worthless.
  • As of Q2 2016, SOHU has $1.3bn in cash and short term investments on its balance sheet, yet its market capitalization is just $1.5bn.
  • Even if the firm were to see profitability fall to historically low levels it would likely be fairly valued at worst.

At $38.73 per share, SOHU.com Inc. has embedded expectations of future performance that are excessively low.

To justify the firm’s stock price of $38.73, SOHU’s Adjusted ROA would have to compress to 2% over the next five years, with a five year CAGR (compound average growth rate) of 26%. To see more about the below chart, and also to be able to input your own scenarios to understand how it impacts valuations, please click here.

SOHU PVP

What the market is thinking and why

Declining profitability, as well as SOHU’s failure to push into mobile gaming, combined with uncertain economic conditions in China, have led to concerns about the long-term prospects of the firm. This has caused SOHU to sell-off substantially, which has led to the firm’s equity trading at levels usually reserved for companies with serious credit issues or companies in dying industries.

Chinese macroeconomic concerns have been headline news for quite some time, and we highlighted our views on the Chinese economy here. This has led to a stock market collapse in the region, and various stocks reaching historically low valuations, including Sohu, which has been punished for both macroeconomic headwinds and its recent strategic missteps.


To find out why the market is wrong, and how high SOHU equity can climb, click here to read the article in its entirety at Seeking Alpha.