Sogou (SOGO 13.24, +0.77, +6.18%), the second largest online search engine in China
(Baidu is #1), got off to a bit of a rough start when it made its IPO debut in
November 2017. The deal priced at $13 and opened for trading at $13.00. After
quickly hitting a high of $14.70, the stock went into a steady downturn,
hitting a low of $7.91 in April 2018. However, the stock has been bouncing back
to above $13. We thought this would be a good opportunity to take a closer look
Sohu.com (SOHU) is Sogou's parent company. SOHU operates a portfolio of online properties in China, including 1) the mass portal and online media destination sohu.com; 2) its Sogou online search engine and 3) its online gaming property, Changyou.com (CYOU), which already trades publicly. Sogou's ultimate parent company and controlling shareholder is Tencent Holdings (TCEHY). The goal here is for SOHU to monetize its online search engine.
Powered by AI (artificial intelligence), Sogou Search is different than other search engines. For example, its cross-language search service eliminates the Chinese-English language barrier, enabling users to discover English content on the Internet by querying in Chinese and reading content that Sogou has translated into Chinese.
Chinese language input software is a must-have for users who type in Chinese. Sogou Input Method is the largest Chinese language input software and is the first cloud-based Chinese language input software. Sogou Search continually captures Chinese expressions and phrases on the Internet, which enables Sogou Input Method to build a comprehensive and up-to-date vocabulary library. This allows Sogou to improve the efficiency and accuracy of predictive text. Sogou Search is the default general search engine in Tencent's Mobile QQ Browser and qq.com. Sogou is considering other possible collaborations with Tencent.
From an industry perspective, more companies in China are using the Internet to expand their businesses and promote their brands. Similar to the global trend, advertising spending in China is shifting from traditional media outlets to online advertising. The growth in the online search market in China has also been underpinned by the increased adoption of mobile devices and the rapid ramp-up of mobile search traffic.
On April 25, Sogou reported solid Q1 results. The company is profitable, and revenue jumped 53% year/year to $248.4 mln. Sogou made progress on what it calls its "twin-engine" growth strategy, centered on core search and mobile keyboard. Sogou posted healthy business growth with core search revenue growing more than 50%, as the company expanded its unique content in key verticals such as healthcare and education, further differentiating its search services. Also, Sogou Mobile Keyboard continued to gain traction with the addition of a further 30 mln daily active users, taking the total DAU to 362 mln, each of whom spends an average of one hour a day using the app.
Sogou remains focused on language-centered AI technologies, including translation, voice and computer vision, which enable the company to continuously optimize its core products. Leveraging its proprietary machine translation technology, Sogou launched the Sogou Smart Travel Translator, which became a bestseller among peer products. In voice technology, Sogou Mobile Keyboard processed an average of 280 mln voice requests per day, making it the largest voice application in China.
In sum, Sogou has a number of attractive qualities. It's a big player in Chinese online search, behind only BIDU. It's an attractive market as China is the world's most populous nation and it has a fast-growing online search market. It's a massive but under-monetized user base and Sogou is seeking to exploit that. Also, Chinese companies are increasingly shifting their advertising dollars online. The rapid ramp-up of mobile search traffic has also bolstered this market. There are some negatives as well. The Chinese government has stepped up its regulation of the industry. This has caused some advertisers to pull back on online spending to some degree. Overall, this one-time busted IPO is starting to climb back.
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