Deutsche is out downgrading Sohu.com (NASDAQ:SOHU) to Sell from Buy with a $39 tgt.

According to the firm, Sohu has succeeded in its spin-off of gaming affiliate Changyou, but they fear growth expectations of both on-line ads and games implied in Sohu's current share price could prove too optimistic.

- On the advertising front, they assume that Sohu achieves only 9% YoY revenue growth in 2009 (cut from 13%), a pace they believe to be slower than consensus. While the company claims itself capable of achieving 12-18% YoY ad revenue growth in 1Q, they are taking a cautious stance toward its online ad outlook in 09 given:

1) a strong base in 2008,

2) major advertising accounts seem to be cutting ad budget.

3) management issues and,

4) intensifying competition.

- On the online gaming front, they expect revenue from TLBB to grow 28% in 2009 and slow to 11% in 2010. Despite achieving 437% revenue growth in 2008, past precedent suggests TLBB should experience substantial revenue growth deceleration in 2009 and 2010. Moreover Deutsche does not expect games in the pipeline to become meaningful revenue contributors in the near term, given current visibility and market anticipation. They forecast incremental revenue from these games will amount to US$3.3m in 2009 and US$11.6m in 2010.

They believe current share price suggests a still overly optimistic view towards Sohu financial performance in 09, which they believe is unachievable. Further, they highlight Sohu’s online ad business should trade at a discount to that of Sina, given its structurally weaker position in brand ad while current share price implies 20x 09 PE for Sohu and 22x for Sina.

Notablecalls: I suspect SOHU will get hit on this (at least early on). Very prone to squeeze, though.