Sogou Inc (NYSE:SOGO): Good Growth, Poor Health

Sogou Inc (NYSE:SOGO) continues to post impressive revenue growth and its prospects have never been brighter. I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.

First, a short introduction to the company is in order. Sogou Inc. provides search and search-related services in the People’s Republic of China. Since starting in 2005 in China, the company has now grown to a market cap of US$3.22B.

SOGO is exceeding expectations, with top-line rocketing up by 37.54% from last financial year , and a bottom line growth of 106.32%. Since 2013, revenue has increased by 21.82%, lifted by previous years of higher capital expenditure, which most recently reached US$64.03M. With continual reinvestment into business operations, a return on investment of 22.12% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to US$113.99M in the upcoming year, and over the next five years, earnings are predicted to grow at an annual rate of 40.92% on average, compared to the industry average rate of 20.69%. These numbers tell me that SOGO has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.

Investors tend to get swept up by a company's growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. With zero-debt on its balance sheet, SOGO doesn't have to worry about maintaining a high level of cash to meet debt obligations and paying near-term interest costs. These constraints can be a burden for high-growth companies as it prevents them from reinvesting cash from operations back into the business to fuel further growth. The value of financial flexibility may outweigh the benefit of lower cost of capital for SOGO, which debt funding usually provides compared to issuing new equity. However, the company has plenty of headroom for borrowing, and the expected growth, to have debt funding as an option in the future. SOGO has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like SOGO as a business is its low level of fixed assets on its balance sheet (10.73% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. SOGO has virtually no fixed assets, which minimizes its downside risk.

The current share price for SOGO is US$8.27. With 386.84 million shares, that's a US$3.22B market cap - which is too high, even for a company that has a 5-year cumulative average growth rate (CAGR) of 21.82% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$113.50M, the target price for SOGO is US$6.78. This means the stock is currently trading at a massive premium of 21.91%. Also, comparing SOGO's current share price to its peers based on its industry and earnings level, it's overvalued by 38.02%, with a PE ratio of 36.79x vs. the industry average of 26.66x.

SOGO's investment thesis is a positive one. The stock is appealing because of its strong fundamentals - financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.