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Will Sohu (SOHU) Disappoint This Earnings Season?

Read MoreHide Full Article Inc. (SOHU - Free Report) is set to report second quarter 2014 results on Jul 28. Last quarter, it posted an 8.28% positive surprise. The company has posted an average positive earnings surprise of 37.6% over the past four quarters.  

Let’s see how things are shaping up for this announcement.

Growth Factors This Past Quarter

We believe that Sohu’s innovative product pipeline and strong traffic growth in the search, online video and mobile businesses will drive top-line growth in the long run. Moreover, strong growth potential exists in the online gaming business. Additionally, the partnership with Tencent will boost Sogou’s traffic, which will further drive Sohu’s top line, going forward.

Further, with continued organic growth and the support of Tencent's vast online properties, Sogou's market share in PC and mobile search is expected to expand over time. However, we believe that there is still substantial room for Sogou to improve its search monetization capability.

However, Sohu is a relatively small player in the online advertising market and continuing investments in product development are necessary to expand its market share. This will keep margins under pressure in the near term but strengthen the long-term competitiveness of the company in China. Despite higher spending, we believe that market share gain will be difficult in the near term due to stiff competition in most of its operating markets.

Earnings Whispers?

Our proven model does not conclusively show that Sohu is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP:  Both the Most Accurate estimate and the Zacks Consensus Estimate stand at a loss of $1.21. Hence, the difference is of 0.00%.

Zacks Rank #4 (Sell): We caution against stocks with Zacks #4 and #5 Ranks (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

  • Silicon Motion Technology Corp. (SIMO - Free Report) , Earnings ESP of +12.90% and Zacks Rank #1 (Strong Buy)
  • Iron Mountain Inc. (IRM - Free Report) , Earnings ESP of +7.69% and Zacks Rank #2 (Buy)
  • Western Digital Corporation (WDC - Free Report) , Earnings ESP of +4.02% and Zacks Rank #2

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