The stock of Sohu.com (NAS:SOHU, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $15.95 per share and the market cap of $626.9 million, Sohu.com stock appears to be significantly overvalued. GF Value for Sohu.com is shown in the chart below.
Because Sohu.com is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Sohu.com has a cash-to-debt ratio of 0.72, which which ranks worse than 83% of the companies in Interactive Media industry. The overall financial strength of Sohu.com is 4 out of 10, which indicates that the financial strength of Sohu.com is poor. This is the debt and cash of Sohu.com over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Sohu.com has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $749.9 million and loss of $2.21 a share. Its operating margin is 11.40%, which ranks in the middle range of the companies in Interactive Media industry. Overall, the profitability of Sohu.com is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of Sohu.com over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Sohu.com is -25.3%, which ranks worse than 87% of the companies in Interactive Media industry. The 3-year average EBITDA growth is 40.8%, which ranks better than 75% of the companies in Interactive Media industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Sohu.com's ROIC was -2.03, while its WACC came in at 10.43. The historical ROIC vs WACC comparison of Sohu.com is shown below:
In conclusion, The stock of Sohu.com (NAS:SOHU, 30-year Financials) appears to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 75% of the companies in Interactive Media industry. To learn more about Sohu.com stock, you can check out its 30-year Financials here.
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