Sogou IPO depends on close ties with Tencent for generating Wall Street heat

Baidu rival Sogou is planning an IPO in the US. But convincing investors to back a distant No. 2 in China’s mobile- search market could be tricky. Sogou’s relationship with backer Tencent will be key.

On Monday, controlling shareholder Sohu said it wanted to float the unit. While it did not give any financial details, Sogou Chief Executive Wang Xiaochuan told Bloomberg earlier this year he expected a $ 4 to $ 5 billion valuation.

That looks like a stretch. To be sure, Sogou, or “search dog,” is growing faster than Baidu. Second- quarter revenues of $ 211 million were up 20 percent on a year earlier. Comparable sales at Baidu rose 5.6 percent. But this is from a low base – Baidu’s search revenues are more than ten times larger. And the dominance that Alphabet’s Google unit enjoys in Western search shows this is something close to a winner- takes- all market: the largest player typically enjoys a virtuous circle where more users means better data and more interest from advertisers.

Analysts at 86Research argue Sogou ought to be worth about 16 times next year’s earnings, adjusting for its cash holdings, and then applying a haircut for its second place in the market. That translates to an equity value of about $ 2.7 billion.

Achieving more will require Sogou to play up its ties with Tencent, China’s most valuable technology company. The latter bought a stake in 2013 and folded in its Soso search unit. Sogou says a big chunk of traffic now comes from Tencent platforms, including the phenomenally popular chat app WeChat, and search results now include public WeChat content.

Mobile sales made up 76 percent of total search revenues in the second quar- ter, up from 49 percent last year, Wang told investors recently.

If Sogou can persuade investors WeChat will help deliver years of turbocharged growth, that would be a great result.