The stock of Sohu.com (NAS:SOHU, 30-year Financials) is estimated to be 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 $17.67 per share and the market cap of $694.5 million, Sohu.com stock shows every sign of being 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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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Sohu.com has a cash-to-debt ratio of 0.72, which ranks worse than 84% of the companies in Interactive Media industry. Based on this, GuruFocus ranks Sohu.com's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Sohu.com over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Sohu.com has been profitable 2 years over the past 10 years. During the past 12 months, the company had revenues of $749.9 million and loss of $2.21 a share. Its operating margin of 11.40% in the middle range of the companies in Interactive Media industry. Overall, GuruFocus ranks Sohu.com's profitability as poor. This is the revenue and net income of Sohu.com over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Sohu.com is -25.3%, which ranks worse than 87% of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is 40.8%, which ranks better than 73% of the companies in Interactive Media industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Sohu.com's return on invested capital is -2.03, and its cost of capital is 10.51. The historical ROIC vs WACC comparison of Sohu.com is shown below:
In conclusion, The stock of Sohu.com (NAS:SOHU, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 73% 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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