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Sohu.com Inc (SOHU): Forget Search and Video — Check Out This Stock’s Gaming Profits

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Sohu.com Inc (NASDAQ:SOHU) finds itself in a tight space — it competes in many areas, but it’s not the best in any of them. Fortunately, Sohu.com Inc (NASDAQ:SOHU) does have one business that’s raking in the dough: online gaming.

Two surprising facts from Sohu’s annual report
When analyzing Sohu’s business, you may quickly get this picture: Sohu.com Inc (NASDAQ:SOHU) lags behind Baidu.com, Inc. (ADR) (NASDAQ:BIDU) in search, Youku Tudou in video, and Tencent and SINA in online portals.

Sohu.com Inc (NASDAQ:SOHU)

The company does have a $1 billion war chest to tackle its competitors. But, it’s doubtful that $1 billion will go far. Sohu is competing in extremely competitive industries, and will probably burn all of its cash to battle these top dogs. Luckily, Sohu can choose to forgo any confrontation in search, video, and online portals.

Instead, Sohu.com Inc (NASDAQ:SOHU) can choose to tackle online gaming.

Now, before you laugh, consider this: Last year, Sohu raked in 60% of its revenues from its gaming division. That means that Sohu generates more of its money from online gaming than it does from search, video, and portal advertising combined! If you don’t believe me, just check out the income statement in their annual report.

To be fair, these revenues come from their stake in game company Changyou.Com Ltd (ADR) (NASDAQ:CYOU). Because Sohu owns a majority stake in Changyou.Com Ltd (ADR) (NASDAQ:CYOU), Sohu must consolidate all financials into its statements — even as Changyou.Com Ltd (ADR) (NASDAQ:CYOU) is independently listed on stock exchanges. Whatever the case, Sohu actually created Changyou — it started as a business unit in 2003, then was spun out in 2007. In any case, Sohu should do some serious soul-searching.

Just look at its fat profit margins from online gaming. In 2012, Sohu.com Inc (NASDAQ:SOHU)’s advertising gross profit margin was 44%. Not bad, but Sohu’s gaming gross profit margin was about DOUBLE that. Surprisingly, compared to the gross profit margin from the gaming industry, Sohu is among the best.

Company Gross Margin
Giant Interactive Group Inc (ADR) (NYSE:GA) 87%
Sohu 86%
Perfect World 84%
NetEase, Inc (ADR) (NASDAQ:NTES) 68%

Source: 10-Ks

However, it’s understandable that you may worry about Sohu.com Inc (NASDAQ:SOHU)’s gaming business. If it focuses solely on this industry, Sohu will have to go toe-to-toe with industry giants.

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