Citigroup Reiterates Buy Rating on Sohu.com (SOHU)

Citigroup is out with a research report this morning, where it reiterates its Buy rating on Sohu.com SOHU; it has a $53.00 price target on the stock. The Citi analysts said, “Sohu delivered a solid 2Q10, beating top and bottom with total revs growing 15% YoY and non-GAAP NI growing 7% YoY (before NCI). Specifically, branded advs revs grew 22% YoY, at the high end of guidance range. Sohu guided 3Q branded advs to grow 31%-35% YoY, and online games to grow 20%-25% YoY. Margins declined slightly QoQ in 2Q, mainly due to lower online games margins, however, branded advs gross margins rebounded 130bps despite increased investment in video content cost and World Cup related spend.” They added, “We rate Sohu as Buy/Low Risk (1L) with a target price of US$53. Although we remain cautious on potentially prolonged margin pressure for its Portal/Brand Ad business as Sohu continues to invest aggressively in its video strategy to defend its competitive position, since Sohu's stock has come off ~15% since late April and is now trading ~20% below our target price; we believe a Sell rating is no longer justified given the substantial upside potential. We maintain the US$53 TP, based on P/E-based SOTP ('10E P/E of 20x for Portal; 13x for CYOU/Gaming).” The Citi analysts further noted, “Our US$53 target price is derived from a P/E-based SOTP valuation methodology. Our SOTP breaks down as follows: 1) Changyou/Online Gaming at 13x 2010E earnings; 2) Portal at 20x 2010E earnings, which for reference is at 40% discount to our target 33x P/E for Sina, mainly reflecting Sohu's secondary market position and lower margins. We round down our SOTP fair value of US$53.44 to reach our target price.”