The U.S. might not be a fast-growing country, but China certainly is. And
thanks to the wonders of the global stock listings, you can own shares in
China's even faster-growing Internet market. Candidate companies include
Chinese Internet portal Sohu.com (NASDAQ: SOHU ) and online game developer
Changyou (NASDAQ: CYOU ). But is either stock worth your money? On Monday, Sohu
reported briskly growing third-quarter numbers, although its EPS fell a bit
short of expectations. Sohu enjoyed a 19% net income rise to $64.3 million
thanks to strong online advertising of $76.7 million and online gaming up 35%
to $115.8 million. Sohu's total revenue of $233 million rose 42%, almost $5
million more than expected. But its earnings per share of $1.17 were a penny
less than analysts surveyed by Thomson Reuters I/B/E/S . And Sohu is not alone
among Chinese Internet companies reporting Monday. For example, Changyou also
reported rapid growth. Its revenue grew faster than Sohu's, but its profits
grew more slowly. Nevertheless, at least as far as beating expectations is
concerned, CYOU outperformed SOHU. Changyou reported a 39% increase in its
revenue to $119 million and a 16.6% rise in net income, compared to the previous
year, to about $53 million. CYOUs adjusted EPS of $1.01 per share beat
expectations by three cents, and its revenue was $1.5 million more than analysts
had expected . Behind Changyou's revenue growth are new games. As Changyou CEO
Tao Wang explained, these popular games include Tian Long Ba Bu, or TLBB, whose
new version, introduced Oct. 20, added to "the number of users and the number
of active paying accounts." And its Duke of Mount Deer game appeals to
"hard-core game players." So should you invest in Changyou stock and skip
Sohu? If youre willing to bet on these volatile stocks, Id consider using the
downdraft in their stocks today as an opportunity to buy both with a slight
edge to Changyou. Heres why: Sohu: Good growth, fat margins; cheap stock.
Revenues for SOHU have increased 18.9% in the past 12 months to $710 million,
while net income climbed 1% to $74 million yielding a whopping 32.1% net profit
margin. (These Chinese Internet companies are based in the Cayman Islands and
therefore pay very low tax rates.) SOHUs price/earnings-to-growth ratio of 0.61
(where a PEG of 1.0 is considered fairly priced) is cheap on a P/E of 14.53 and
expected earnings growth of 23.6% to $5.74 in 2012 . Changyou: Healthy growth,
strong margins; inexpensive stock. CYOU's sales have climbed 22.3% in the past
12 months to $379 million, while net income jumped 20.9% to $200 million
yielding a huge 52.8% net profit margin. Changyous PEG of 0.35 is very
inexpensive on a P/E of 7.5 and expected earnings growth of 21.4% to $4.98 in
2012 . With Monday's earnings disappointment, Sohu stock has lost 11% of its
value. This could be a good opportunity to buy the stock at a lower price.
However, it also throws into question whether SOHU can meet its 2012 earnings
growth target. But Changyou stock is even cheaper if it can meet its 2012 growth
expectations. SOHU and CYOU are volatile, making both stocks risky bets. But
their high profit margins and exposure to the rapidly growing Chinese Internet
market make each of them attractive bets for the edge of your risk/return
investment frontier. As of this writing, Peter Cohan did not own a position in
any of the aforementioned stocks.
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