Beijing-based Sogou Inc (NYSE:SOGO) has seemingly moved straight up in June. Since the beginning of the month, the Chinese internet search company has risen more than 35%. With impressive growth, healthy financials, and a relatively small size, investors might find themselves wanting to climb aboard the SOGO stock train.
However, one larger company still dominates search. Given the history of non-dominant search engines, investors need to approach SOGO cautiously.
Chinese Stocks Are Gaining Attention
The stock has seen a wild ride since its debut on the New York Stock Exchange last November. After debuting at $13 per share, the stock tumbled over the next few months, briefly falling below $8 per share in April. After hitting that low, the stock moved steadily higher. However, the move upward since June that has caught everyone’s attention.
As our own Bret Kenwell rightly pointed out, Americans have largely ignored Chinese stocks. Perhaps Charlie Munger pointing this out at the annual meeting of Berkshire Hathaway, Inc. (NYSE:BRK.A, NYSE:BRK.B) shareholders in May served as a wake-up call.
Munger makes a good point. In today’s market, we see American investors bid up the value to Amazon.com, Inc. (NASDAQ:AMZN) or Netflix, Inc. (NASDAQ:NFLX) into triple-digit price-to-earnings (PE) ratios without a second thought.
In contrast, SOGO and its principal competitor, Baidu Inc (ADR) (NASDAQ:BIDU), enjoy no such valuations. The same goes for Chinese internet retailers such as Alibaba Group Holding Ltd (NYSE:BABA) or JD.Com Inc(ADR) (NASDAQ:JD).
SOGO stock currently trades at a forward multiple of just over 37. While that exceeds S&P 500 averages, it stands as a screaming bargain compared to Amazon.
SOGO Stock’s Solid Financials
Also, in fairness, the financial statements for SOGO stock also speak to both massive growth and stability. In 2014, the first year the company published public financial reports, SOGO brought in $368.38 million in revenue.
This year, analysts expect to see revenues hit $1.29 billion after coming in at $908.36 million in 2017. In percentage terms, this exceeds the growth rate of Baidu. Analysts predict 20% profit growth this year, and over 50% net income growth in 2019.
In addition to the massive growth, the company’s solid balance sheet should also garner attention. SOGO stock currently sits on over $1.1 billion in cash and holds no debt.
Its comparatively small size might also draw investors. The company’s market cap stands at $5.4 billion. This makes SOGO less than ten percent of the size of Baidu. It is also less than one percent of the size of the dominant search engine in the rest of the world, Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG).
History Is a Problem for SOGO
Despite its many positive attributes, the ultimate question for SOGO stock hinges on market share. Despite its strong growth, Sogou commands only 3.71% of the internet search market. Baidu remains the dominant player at over 70%.
However, some glimmer of hope rests on the fact that Baidu does not dominate search in China to the degree that Google monopolizes the rest of the world. Second-place search engine Shenma Inc. commands a market share of around 19%. Sogou is currently engaged in a battle with Qihoo 360’s Haosou search engine for third place.
American investors have good reason to stay wary of search engines with small market shares. Those who followed tech stocks in the 90s can remember companies such as Ask.com (formerly Ask Jeeves) or Excite. Both now exist as part of IAC/Interactive Corp (NASDAQ:IAC) and both command less than one percent of the search market.
China constitutes a much larger market than the U.S. For that reason, I expect the growth to continue. However, Sogou faces the risk that its much larger peers could out resource the search engine.
The Bottom Line on SOGO
Despite its many positive qualities, investors should approach SOGO cautiously. Sogou’s growth rates and financial stability have rightly attracted investor interest lately. A high level of revenue and profit growth along with a stable balance sheet have likely driven the massive increase in the stock price. Its relatively small market cap will also attract investors hoping to get in early.
Unfortunately, the history of non-dominant search engines bodes poorly for SOGO stock. Like Ask.com and Excite before it, the end game could end in a buyout. SOGO’s solid balance sheet increases the likelihood that a buyout would be favorable to investors. However, not all buyouts end so favorably.
The fundamentals indicate buyers should jump into SOGO. While I will not say “don’t buy,” I will urge investors to heed the lessons of history and exercise caution.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.