Executive Summary / Key Takeaways

• Sohu.com Limited is strategically pivoting its media platform towards a social network-centric model, leveraging unique events and content IPs to build user engagement and community, while its online gaming segment provides a stable, profitable core.
• The company faces significant macroeconomic headwinds impacting its marketing services revenue, with Q3 2025 guidance reflecting continued declines, yet its gaming business shows resilience with expected sequential growth driven by new content.
• Sohu maintains a robust liquidity position, with substantial cash and short-term investments exceeding its market capitalization, providing a "war chest" for its strategic investments in social network development and gaming innovation.
• Technological advancements, particularly in AI, are being integrated to enhance efficiency in game development and improve content generation and user tools on the media platform, though AI's direct impact on social network growth is considered marginal.
• Despite ongoing net losses and a challenging advertising market, Sohu's long-term investment thesis hinges on the potential for its social network strategy to reach a "critical point" of exponential user growth and monetization, alongside sustained performance from its diversified gaming pipeline.

Sohu's Dual Engine: A Strategic Pivot in China's Digital Arena

Sohu.com Limited, incorporated in 1996 in Beijing, China, operates as a long-standing online media platform and gaming company within China's dynamic digital ecosystem. The company's overarching strategy is centered on a dual-engine approach: transforming its media platform into a vibrant social network and continuously evolving its online gaming business. This strategic pivot is a direct response to the intense competition from larger, more integrated rivals like Tencent Holdings Limited (TCEHY), NetEase, Inc. (NTES), Baidu, Inc. (BIDU), and Alibaba Group Holding Limited (BABA), which dominate through broader ecosystems and extensive resources. Sohu aims to carve out and strengthen its niche by fostering deep user engagement through specialized content and community-building initiatives, while leveraging its established brand and proprietary content platforms.

In the competitive landscape, Sohu's media and content services, delivered through platforms like the Sohu News App and Sohu Video App, differentiate themselves through user-friendly interfaces and a focus on personalized experiences. However, the company operates with a smaller scale compared to its rivals, which often translates to higher operational costs and less financial resilience. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Sohu's strategic focus on specific verticals, such as its leading position in K-pop content on Sohu Video, suggests a targeted approach to maintaining relevance. The company's gaming offerings, primarily through its Changyou segment, compete directly with NetEase, but Sohu's bundled services, combining games with news and video, offer a unique value proposition for users seeking an all-in-one platform.

Technological Edge: Fueling Efficiency and Engagement

Sohu is actively integrating advanced technologies, particularly Artificial Intelligence (AI), to enhance both its gaming and media operations. In its online game business, AI technology is extensively applied across various stages of development. This includes art design, art production, UI design, audio effect design, and the creation of marketing materials, all of which have significantly improved efficiency and productivity. The company has also made progress in using AI to enable self-learning planning within game development, further streamlining processes.

For the Sohu media platform and its social networks, AI's role is more supportive, primarily aiding users in information retrieval and content creation. AI helps users obtain answers and results through the search capabilities embedded in applications like Sohu Video and Sohu News. While management notes that AI's direct impact on the social network's core people-to-people interaction strategy is "marginal," it is crucial for improving content generation, text-based abstract writing, internal editing, and providing tools for live streaming, such as automatic subtitles and digital imaging. Sohu utilizes a combination of open-source language models, upon which it builds its own developments, and integrates models like DeepSeek into its applications. This technological approach contributes to Sohu's competitive moat by enhancing operational efficiency in gaming and providing better content tools for its media users, thereby supporting user engagement and potentially improving monetization opportunities.

The Media Platform: A Social Network Transformation

Sohu's media platform is undergoing a significant transformation, shifting its focus from traditional internet media to a social network-centric model. This strategic initiative involves continuous product refinement, optimization of social network operations, and enhancing synergies across its product matrix. The goal is to increase user engagement, consolidate brand influence, and unlock new monetization opportunities. A key component of this strategy is hosting diverse and distinctive online and offline events.

In 2025, these efforts continued with events such as the 2025 Sohu K-pop Dancing Festival, which attracted numerous K-pop enthusiasts and became a blockbuster event in the field. The company also hosted the 2025 Chinese costume model competition, "Li Yi Hua Xia Hanfu," which completed nearly 80 contests across almost 30 regions in China. Sohu Video has established itself as the leading K-pop platform in China, attracting South Korean K-pop teams for events and consolidating its user base in this vertical. Additionally, the "Charles' Physics Class," a leading IP, continues to deliver cutting-edge physics knowledge and hosts high-end dialogues with Nobel Laureates, attracting significant traffic and promoting Sohu's brand influence. These events not only foster community but also provide unique marketing solutions for advertisers, generating sponsorship revenue.

Despite these strategic efforts, the media platform faces substantial macroeconomic headwinds. The advertising market remains soft due to a challenging economic situation, characterized by uncertainties, decreased consumer spending, and cautious marketing investments from companies. While the auto sector remains the largest for Sohu's marketing services, followed by FMCG and IT services, the overall trend in 2024 saw auto advertising budgets cut by almost half. FMCG has recently risen to the top sector, as consumers shift spending towards smaller items like food, alcohol, and electronics. Management acknowledges that achieving breakeven for the media platform is "very hard" in the current environment, especially with the simultaneous focus on three products, and does not anticipate it in the next few quarters. The company views this as a "multiple battlefield fight" requiring sustained investment to reach a "critical point" of exponential social network growth.

Gaming Powerhouse: Sustaining Growth Amidst Competition

Sohu's online game business, primarily operated through its Changyou segment, has consistently delivered solid results, underpinned by a dedication to user needs through compelling new content and continuous game optimization. The company's "top games strategy" is anchored in user trend-centric principles, with ongoing efforts to optimize its research and development system to enhance efficiency and product success rates. This segment maintains its core competitiveness in MMORPGs while actively diversifying its portfolio into card-based RPGs, sports games, and casual games, alongside expanding its offerings for global markets.

In the second quarter of 2025, the online game business performed well, with revenues reaching the high end of guidance. Key initiatives included the launch of an expansion pack for "regular TLBB PC" to celebrate its 18th anniversary and various events for the Dragon Boat Festival. "TLBB Vintage" received a skill enhancement system upgrade, and "Legacy TLBB Mobile" celebrated its eighth anniversary with an expansion pack. Looking ahead, the company plans to continue launching expansion packs and content updates for the "TLBB" series and other titles. A new version of the TLBB PC game, "TLBB Return," was rolled out in July 2025, expected to bring additional revenue. The company also has approximately 10 games under development for 2025, including "NBA Absolute Superstar" and "Hero: Three Kingdoms," which have obtained license approval and are slated for testing. This robust pipeline and strategic diversification are crucial for sustaining growth amidst intensifying market competition and rising user demand for quality and innovation.

Financial Performance: A Tale of Two Segments

Sohu's recent financial performance reflects the divergent trajectories of its two core segments. For the second quarter of 2025, total revenues were $126 million, marking a 27% year-over-year decrease and a 7% quarter-over-quarter decline. Marketing services revenues stood at $16 million, down 21% year-over-year but showing a 14% sequential increase. Online game revenues were $106 million, a 28% year-over-year decrease and a 10% quarter-over-quarter decline. The GAAP net loss attributable to Sohu.com Limited improved to $20 million, compared with a net loss of $38 million in the second quarter of 2024.

In the first quarter of 2025, total revenues were $136 million, a 3% year-over-year decrease but a 1% sequential increase. Marketing services revenues were $14 million, down 15% year-over-year and 27% quarter-over-quarter. Online game revenues were $117 million, flat year-over-year and up 7% quarter-over-quarter. Notably, the GAAP net income of $182 million in Q1 2025 was primarily driven by a one-time accounting reversal of a previously recognized uncertain tax expense, amounting to approximately $199 million, and did not involve actual cash flow. For the full year 2024, total revenues were $598 million, flat compared to 2023. Brand advertising revenues (now marketing services) were $73 million, a 17% decrease from 2023, while online game revenues increased by 5% to $502 million. The company reported a GAAP net loss of $100 million for the full year 2024.

Sohu's latest TTM financial ratios show a gross profit margin of 74.83% and a net profit margin of 22.66%, but an operating profit margin of -14.51% and an EBITDA margin of -11.04%, underscoring the profitability challenges, particularly from the media segment's operating losses. The company's current ratio of 3.05 and quick ratio of 3.05 indicate strong short-term liquidity.

Capital Allocation and Liquidity: A War Chest for Growth

Sohu maintains a robust liquidity position, which management views as a "war chest" essential for funding its strategic initiatives. As of July 31, 2025, the company had repurchased 6.6 million ADS for an aggregate cost of approximately $83 million under its $150 million share repurchase program. This represents over half of the total commitment. The Board of Directors extended the program for an additional year to November 10, 2026, primarily due to daily volume limitations that restrict the pace of repurchases to approximately $50 million per year without significantly impacting the stock price.

Despite its strong cash position, with total cash, cash equivalents, and short-term investments of $826.06 million (TTM), Sohu has no immediate plans for other capital investments or returns, such as dividends. This decision underscores the company's commitment to allocating resources towards its "major user base building and social network wall" strategy. The company's market capitalization of $484.05 million is significantly lower than its cash and short-term investments, and its price-to-book ratio of 0.44x, with a book value of $36.83 per ADS, suggests that the market is valuing the company below its net asset value. This valuation dynamic highlights the market's skepticism regarding the profitability of the media segment and the long-term growth prospects, despite the underlying asset strength.

Outlook and Risks: Charting an Uncertain Course

For the third quarter of 2025, Sohu anticipates marketing services revenues to be between $40 million and $50 million, implying an annual decrease of 20% to 25% and a sequential decrease of 4% to 10%. This guidance reflects the ongoing weakness in advertising sentiment due to macroeconomic uncertainties and reduced consumer spending. Online game revenues are projected to be between $107 million and $117 million, implying an annual decrease of 8% to 16% but a sequential increase of 1% to 10%. This sequential improvement is attributed to the expected stable performance of older games and additional revenue from the new "TLBB Return" PC game launched in July 2025. Both non-GAAP and GAAP net loss attributable to Sohu.com Limited are expected to be between $25 million and $35 million.

The company faces several pertinent risks. The macroeconomic situation in China, with its impact on consumer disposable income and corporate marketing budgets, remains a significant challenge for the media platform. Management acknowledges the difficulty in achieving profitability for this segment in the near term, emphasizing the non-linear nature of social network growth and the need to reach a "critical point" for exponential expansion. In the gaming sector, intensifying market competition and evolving user demands necessitate continuous innovation and R&D investment. Furthermore, while currently speculative, the ongoing discussions around ADR delisting risks present a potential long-term uncertainty, though management indicates they would assess alternatives if such a risk materializes, noting the company is not dependent on being listed at all times.

Conclusion

Sohu.com Limited stands at a pivotal juncture, actively transforming its media platform into a social network-centric entity while relying on its online gaming business for stability and growth. The core investment thesis is rooted in the potential for its social network strategy to eventually achieve critical mass, unlocking significant monetization opportunities, complemented by a resilient and diversifying gaming portfolio. Despite the current macroeconomic headwinds severely impacting advertising revenue and contributing to ongoing net losses, Sohu's substantial liquidity provides the necessary capital to fuel these strategic investments.

The company's commitment to leveraging technological advancements, particularly AI for efficiency in gaming and content enhancement in media, underscores its adaptive approach to market dynamics. While the path to profitability for the media segment remains uncertain in the short term, the long-term outlook hinges on the successful execution of its social network vision and the continued innovation within its gaming pipeline. Investors should closely monitor the progress of user engagement on its social platforms, the performance of new game launches, and any shifts in the broader macroeconomic environment as key indicators of Sohu's future trajectory and its ability to realize the full potential of its dual-engine strategy.