Sohu Shares Gap Higher Following Goldman's 'Conviction Buy' Call, Sell Off Throughout Session As Traders Take Profits
Goldman Sachs earlier upgraded its investment assessment on Sohu.com Inc. (NASDAQ: SOHU) from Neutral to Buy. Fei Fang, an analyst behind the report, established a twelve-month price target of $98, up from his price target of $55. As highlighted in the Goldman note, the new price target represents a potential return of 41 percent from where Sohu shares are currently trading.
Importantly, Fang also added Sohu to Goldman's "Conviction Buy" list. "Costly investments in video, search, and mobile assets may finally be bearing fruit," Fang said.
Sohu's profits declined in 2012, driving share price down despite the healthy internet sector. The expanded product portfolio -- a result of the aforementioned investments -- is bringing in more users, leading to monetization which "is ramping up," according to the Goldman analyst. Video and search revenues are growing. Overall profit will be on a growth track soon.
"A sequence of positive catalysts" is behind the upgrade. Fang believes Sohu benefits from its popular program 'Voice of China' over the near term. The program has accelerated user growth for Sohu, and mobile and desktop ad space around the broadcasts has sold to prestigious brands such as Mercedes-Benz and Chanel, a signal of "overall media strength."
In the medium term, Fang believes Sogou, Sohu's search engine, will stop hindering earnings per share as the service's new video platform increases advertising opportunities.
Long term, Fang expects Sogou's monetization to improve. This factor, along with the video platform's competitive positioning, will grow Sohu's margins, adding valuation.
While Sohu shares gapped around 2.5 percent higher at Tuesday's opening, the stock gave up all the gains and then some as traders began digesting the contents of an 8-K filing from Monday afternoon. Sohu shares last traded at $67.67, down nearly 3 percent for the session.
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