Sohu.com Shares Plunged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Sohu.com (NAS: SOHU) fell more than 12% on after reporting higher-than-expected costs in the third quarter. Online games subsidiary Changyou.com (NAS: CYOU) closed off by a similar amount.

So what: Sohu.com said operating expenses increased 66% from last year's Q3. Gross margin fell from 74% to 71% over the same period. But is that really so bad? Revenue increased 42% to $233 million, after all, appreciably ahead of the $228 million analysts were expecting.

Now what: Maybe Mr. Market is overreacting, but history also says to watch margin compression carefully. Too often it's a sign of waning competitive advantage. Here, an analyst at Roth Capital posits that poor uptake for a new game titled Duke of Mount Deer could have caused the shortfall. Do you agree? Would you buy shares of Sohu.com at current prices? Please weigh in using the comments box below.

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At the time this article was published Fool contributorTim Beyersis a member of theMotley Fool Rule Breakersstock-picking team. He didn't own shares in any of the companies mentioned at the time of publication. Check out Tim'sportfolio holdingsandFoolish writings, or connect with him onGoogle+or Twitter, where he goes by@milehighfool. You can also get his insightsdelivered directly to your RSS reader.Motley Fool newsletter serviceshave recommended buying shares of Sohu.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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