JPMorgan Sees Sohu.com Gaming Revenue Falling 38% In 2016

JPMorgan expects gaming revenue from Sohu.com Inc SOHU to fall 38 percent in 2016, while saying the online media company continues to face challenges across its major business lines.

In gaming, the brokerage noted the company is struggling due to the games' aging and the lack of new successful titles. Furthermore, the portal business is hurt by structural decline of PC traffic and lackluster mobile strategy.

"We believe it will be difficult for Sohu to come up with new initiatives to address these challenges in the near future," analyst Alex Yao wrote in a note.

Yao, who assumed coverage of the stock with an Underweight rating and $40 price target, said the negative trends in gaming business are expected to continue into 2017/18, with decline rate dropping gradually.

"While there could be upside from the partnership with Tencent [TCEHY TCTZF] on two upcoming IP-based mobile games (Legacy TLBB and Xuan Yuan Jian) in early 2017, visibility is poor due to 1) an unconfirmed launch schedule, and 2) high hit-or-miss risk for game developers," Yao highlighted.

Moreover, Sohu's video and search businesses are also in the red. Video ad revenue plunged 33 percent in the first half due to Sohu's conservative content strategy and strong competition from Tencent, Baidu Inc (ADR) BIDU and Alibaba Group Holding Ltd BABA.

"We forecast portal/video ad revenue to decline by 15 percent/grow by 10 percent in FY17E," Yao added.

Yao projects EPS of $(7.10)/$(4.84)/$(5.34) for FY16/17/18 and net sales of $1.646 billion/$1.727 billion/$1.822 billion, respectively.

At time of writing, shares of Sohu had fallen 1.97 percent on the day to $41.70.

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