Zacks_Analysts' Blog : Sohu Looks Attractive - Analyst Blog

Blade Hero 2 is a sequel to Changyou's existing MMPORG game known as Blade Online (BO). One of the company’s oldest games, BO’s peak concurrent user (PCU) reached a new high of 95,000. Blade Hero 2 has begun its closed beta testing and also employs Changyou's graphic technology.

Earnings at both Sohu and Changyou.com came in above the Zacks Consensus. While this was good news, both stocks fell as Changyou pushed back the launch of three new games: "Duke of Mount Deer" (postponed from the fourth quarter of 2009 to the third quarter of 2010), "Immortal Faith" (deferred from the second quarter of 2009 to the first quarter of 2010) and "Legend of the Ancient World" (to be launched in the second quarter of 2010).

Sohu is a small player in the Chinese online games space compared to Shanda (SNDA), NetEase (NTES) and Giant Interactive (GA). It also faces intense competition from Sina Corp. (SINA) and Tencent. Thus, to increase sales and beat competition, Sohu will have to provide quality games to gain market share and attract gamers’ attention. Therefore, it is important for Changyou to take time for creating a quality product rather than making hasty launches that could jeopardize its reputation.

Sohu is China’s third largest web portal, ranking fifth in terms of its market share position in the domestic online gaming sector with a PCU of approximately 970,000. We remain positive on Sohu’s pipeline and the strength in new online games, which is expected to drive meaningful growth in late 2009 and 2010.

Chinese gaming firms like Netease.com and Shanda Interactive are generating good profits and are few of the strong performing stocks this year due to the fast growing domestic online gaming industry. While investors are disappointed with the slower growth rates, hurt by pressures on online spending, robust growth and stable results may be expected from Chinese online gaming companies in the next few quarters.