SOGO Stock Is an Overlooked, Undervalued Growth Machine

SOGO stock - SOGO Stock Is an Overlooked, Undervalued Growth Machine

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Everyone knows Baidu (BIDU) is the Google (GOOG) of China, but not everyone knows that second place—if you’re counting by mobile queries at least—goes to another publicly traded pick: Sogou (SOGO). SOGO stock could be a solid investment in China’s digital future. 

Sogou was spun off from last November for a mere $13 per share. And yet, SOGO stock has only surpassed that original price once since its first few days on the New York Stock Exchange.

Since that $13.85 closing peak in mid-June, shares have been heading nowhere but lower. The initial sell-off after the $13.85 mark was likely some old investors trying to exit their positions at break-even point, but the damage continued after the company released earnings in July.

A Look at SOGO Stock

A look back at the earnings report that caused the sell-off is a perfect example of the fact that Sogou stock is a high-powered growth machine that just can’t seem to catch a break from investors. Put another way, it’s a buy.

The majority of Sogou’s revenue comes from search—but the company is focused on innovation in that area: natural language search, voice and image technologies, etc. In the most recent quarter, SOGO posted a 43% year-over-year increase in revenues and a 41% year-over-year increase in net income, beating Wall Street’s estimates for both figures.

Those figures (and three straight earnings beats) aside, investors seemed more focused on the fact that the report featured not-so-hot forward guidance: revenue of $280 million vs. what Wall Street originally expected: $337 million. That’s around 10% year-over-year growth.

And yet, the Wall Street consensus has adjusted accordingly since then and its sales growth estimate for the full year is still around 30%. Plus, the soft numbers were, for the most part, not because of anything inherent to the business.

“The guidance for the third quarter takes into account the one-time impact of the regulatory investigation, lower hardware sales following the adjustment of the smart hardware strategy, and the depreciation of the RMB,” according to this press release.

While the yuan has weighed on numerous Chinese stocks, the level of growth that SOGO is posting makes the company’s bull case difficult to deny.

For proof, consider this: Sogou is slated to post earnings of 24 cents per share this year, slightly lower than a year ago; yet that number is supposed to expand to 46 cents by next year. Add it up, and the consensus is for 35% long-term growth on the bottom line, which is more than double the stock’s forward P/E of 17.

The Bottom Line on SOGO Stock

At $7.83, the level shares are currently sitting, I think there’s a lot of value to be unlocked here. Yes, the company is spending about 18% of its revenue on research and development at the moment, but it has the top line to support that spending. This will in turn, support innovation and strides in artificial intelligence, which will continue to attract users.

It’s tempting to call Sogou a growth machine in disguise. But really, it’s growth is right out in the open. Wall Street is just too concerned with nitpicking to see growth—and the value it’s bred—in this high-powered search pick.

Buy some shares before everyone realizes how wrong they’ve been.

As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.

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