Looking for the next Internet search portal to take market share
from Baidu (BIDU)? Look no further than Qihoo 360 Technology
Qihoo 360 is the largest Internet security provider in China, with
over 461 million monthly active users, representing a penetration
rate of 96% in arguably the world's largest web market. That's
right. You are talking about the largest common-language/culture
Internet market in the world and QIHU is now the #2 portal.
With that kind of access to the Chinese market, why haven't we
heard of this $7 billion upstart before as a threat to Baidu? And
where does the search element come in?
The Story is Out
Qihoo 360 Technology offers a broad spectrum of Internet and mobile
security products. Its core Internet and mobile security products
include 360 Safe Guard and 360 Anti-virus 360 Mobile Safe, 360 Safe
Browser, 360 Personal Start-up Page, 360 Application Store and 360
In a brilliant strategy move, Qihoo 360 began offering its
cloud-based Internet security products for free to users. And this
has allowed them to monetize their significant audience through
online advertising services, including paid links as well as
Internet value-added services, such as offering access to
third-party Web games and virtual items.
More recently, the company's launch of so.com, its Internet search
engine, is the game-changer for the company as it leverages its
broad reach in China to capture lucrative search market share. The
"360" brand stands for Internet security to the company's users,
and these users are a ripe audience for advertisers.
Take a look at how savvy (and China-connected) investors tripled
QIHU shares in the past 5 months after the launch of so.com, once
they realized the growth potential...
Mobile Search and Gaming
Earlier this month, the company launched 360 Yingshi Daquan, the
mobile version of 360 Video, Qihoo's video vertical search engine.
360 Yingshi Daquan is a 360 mobile app that enables users to search
for and view videos from Qihoo partners on Android based
Like Qihoo's 360 Mobile assistant, the new mobile app will serve as
a mobile traffic hub for the company, attracting mobile users who
ultimately can be monetized by the company. According to CNNIC
(China Internet Network Information Center), during the first half
2013 there were 160 million Internet users accessing online video
using mobile devices in China, a 34.4% utilization rate. As mobile
devices evolve with new technologies including larger screens,
video will continue to be in great demand among mobile users.
What else do Chinese PC and mobile users rely on Qihoo 360 for?
Gaming! Here's how one analyst characterized the growth
"We believe Qihoo possesses a solid mobile search entry point
supported by the strong distribution capability of its app store
which is ranked no. 1 with 21.6% market share by number of times
used in July, according to iResearch. For example, number of
downloads of "Plant vs. Zombie 2" reached 10mn in 36 hours on 360
mobile assistant, compared to 25mn downloads in two months on iOS
Rich Valuation, Compelling Opportunity
There is no doubt that QIHU shares ran quickly to near full
valuation (average analyst target price is $100) once the story was
out that they were grabbing significant search engine traffic from
Baidu. The leader currently owns over 60% of the market, while the
newcomer is pushing 20%.
I recommended this stock 3 weeks ago in the low $80's as an
aggressive growth and trading opportunity. It traded back above $90
and has since come off a bit. For investors, keep an eye on the
earnings momentum. After their last earnings report, which beat
consensus estimates by 100% (just like the previous 3 quarters!),
analysts bumped next year from $1.26 to $1.55 -- that's 80%+
At $85, that's also a forward P/E of 55X. But if the aggressive
growth trends of QIHU keep muscling in on Baidu's turf, this
company may sustain that multiple.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
Follow The Money
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