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On Sep 6, 2013, Zacks Investment Research downgraded (SOHU - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Sohu reported a better-than-expected second quarter result beating the Zacks Consensus Estimate on both lines. Although revenues jumped 18.8% year over year and 10.2% sequentially to $338.9 million, earnings of 56 cents per share plunged 26.8% year over year and 11.4% on a sequential basis.

Revenue improvement was primarily driven by strong performance from the online advertising and online gaming businesses. However, higher operating expenses dragged down overall profitability during the quarter.

Reportedly, Sohu and another Chinese Internet services provider Qihoo 360 Technologies (QIHU - Snapshot Report) had been engaged in active discussions regarding the sale of the former’s Sogou search engine business to Qihoo. However, the talks broke down in mid-August.

Recently, Qihoo raised $550.0 million through bond sale, which it may use for the same purpose. Although Qihoo has denied any such intentions, we believe that this uncertainty will remain an overhang on Sohu in the near term.

The Zacks Consensus Estimate for Sohu’s third quarter of 2013 has declined 38.2% (26 cents) to 42 cents over the last 60 days.

The Zacks Consensus Estimate for 2013 decreased 10.9% (28 cents) to $2.30 per share over the last 60 days. The Zacks Consensus Estimate for 2014 dropped 11.1% (41 cents) to $3.28 per share over the same period.

Other Stocks to Consider

Not all Internet service providers are performing as poorly as We recommend Qihoo 360, which has a Zacks Rank #1 (Strong Buy). Facebook (FB - Analyst Report) and LinkedIn Corp. (LNKD - Analyst Report), both Zacks Rank #2 (Buy) stocks, are also looking good at present.

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