Three of China’s bigger Internet players reported earnings this morning, and the results are lifting virtually all of the country’s Internet stocks. The leader is Sohu.com Inc. (NASDAQ: SOHU), up about 18%, followed by Changyou.com Ltd. (NASDAQ: CYOU), up nearly 16%, and Youku Inc. (NYSE: YOKU), up about 8%.
These stocks, along with shares in Baidu Inc. (NASDAQ: BIDU), SINA Corp. (NASDAQ: SINA), E-commerce China Dangdang Inc. (NYSE: DANG), and Renren Inc. (NYSE: RENN) all trade lower than they did a year ago by anywhere from -7% (Baidu) to -50% (Changyou.com). Only Tudou Holdings Ltd. (NASDAQ: TUDO) is trading higher and that’s due to the company’s coming acquisition by Youku.
What’s happening is that growth has stalled as costs have mounted and the growth of the overall Chinese economy has also weakened. More than 550 million Chinese have Internet access, but user growth rates have fallen from more than 50% to around 10%-12%.
While Sohu.com, a media and gaming company, handily beat consensus estimates for both EPS and revenues, gross margins fell in nearly every area of the business. Total gross margin for the quarter fell from 65% last quarter and 73% in the same-period a year ago to 61% this quarter. Online advertising gross margins fell from 40% last quarter and 60% a year ago to 31% this quarter. Operating expenses at Sohu.com rose 49% year-over-year and 19% sequentially.
Operating profit fell -37% year-over-year and -17% sequentially. Operating margins also fell to 17% in the quarter, from 35% a year ago and 23% last quarter.
At Youku, China’s YouTube, revenues jumped 96%, but so did operating expenses. In every expense category, expenses rose by at least 50% and in some categories expenses doubled or worse. Youku was able to increase its number of advertisers and to increase their average spending.
Changyou, an online game developer and operator that is 67%-owned by Sohu.com, is rewarding shareholders with a special dividend of $3.80 per ADS, which accounts for today’s big share price jump. Like the others, Changyou is seeing expenses rise and cutting into margins. Changyou also plans to spin-off its 7Road.com Ltd. subsidiary, providing another booster for the stock today.
Renren, which reports earnings tomorrow, is up more than 11% today. The social networking platform is expected to post an EPS loss of -$0.04 on $42.2 million in revenue, but the relatively good performance of Sohu.com and the others today are raising hopes. Shares are up nearly 11% at $4.17 in a 52-week range of $3.21-$8.50.
Dangdang reports earnings next week, and the consensus estimate calls for an EPS loss of $0.23 on $186.4 million in revenues. Shares are up 9% at $ 5.47 in a 52-week range of $4.11-$11.25.
Sina also reports next week and the consensus estimates call for an EPS loss of $0.02 on $127.3 million in revenues. Shares are trading today up more than 10% at $49.12 in a 52-week range of $43.12-$114.89.
Baidu, which reported earnings in late July, is up nearly 4% at $129.68 in a 52-week range of $99.71-$154.15. Estimates for the current quarter call for EPS of $1.28 on revenues of $993.4 billion.
Sohu.com’s shares are now up 18% at $40.94 in a 52-week range of $33.75-$84.00.
Changyou’s shares are up about 15.5% at $22.36 in a 52-week range of $17.00-$43.64.
Youku’s shares are up more than 8% at $17.70 in a 52-week range of $13.76-$32.75.
Paul Ausick
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