With the coming IPO of China's largest e-commerce portal,
Alibaba, investors are looking for more ways to play the massive
growth of the world's largest common-language/culture Internet
market. Alibaba, who is still owned 24% by
(YHOO), has astonished web-focused investors with its consistent
profit growth and massive revenue haul.
Alibaba's fourth quarter saw a huge quarterly profit gain -- its
fourth straight -- of $792 million on sales that surged 51% to
$1.78 billion. Word is that Alibaba's transaction volume is greater
than Amazon (AMZN) and eBay combined.
Until the IPO of the "Amazon of China," which is projected to be
valued at as much as $200 billion, I am buying a young upstart in
the Chinese web jungle:
Qihoo 360 Technology
(QIHU), the country's largest Internet security provider, with over
460 million monthly active users, representing a penetration rate
of 96% in the biggest web market.
I first wrote about QIHU last September when I saw them taking the
#2 spot in search next to the giant
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.
In 2013, the company's launch of a search engine so.com was the
game-changer that leveraged its broad reach in China to capture
lucrative search market share and advertising dollars. The "360"
brand stands for Internet security to the company's users, and
these users are a ripe audience for advertisers.
But the innovation didn't stop there. In September, 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 smartphones.
What else do Chinese PC and mobile users rely on Qihoo 360 for?
Gaming! In an early June research report after meeting with QIHU
management, Jefferies analysts noted...
Qihoo has "robust web game growth with strong mobile game player
acquisition. Management continues to see a 40%+ organic revenue
growth and stable ARPU trend on web games with the majority of the
incremental paying gaming accounts attributed to mobile games. The
small acquisition of several game companies in early 1Q14 was done
to improve Qihoo's game platform monetization despite their
low-margin business profile." Jefferies has a $150 price target on
(FB) seems to be hitting its stride with mobile ad revenues, many
analysts believe bigger success is around the corners for QIHU as
well. Here's what Macquarie had to say in late January...
We believe Qihoo is seeing solid trends across all its major
business lines - directory page ads, mobile app store, search and
web gaming. Qihoo remains one of the few platform companies in
China that control the bulk of the Internet and mobile Internet
traffic, thus future monetization opportunities from the traffic.
Controlling "the bulk" of Internet and mobile traffic sounds like a
pretty good position to be in.
According to Bloomberg, "Alibaba is competing with Tencent Holdings
and Baidu for China's 618 million Internet users by making deals in
its home market and the U.S. to extend its e-commerce reach to
mobile games and messaging."
"The growth rates sound like they're pretty positive for the entire
sector, for e-commerce. They have a large base, they have the
lion's share of e-commerce in China," said Stephen Yang, a Hong
Kong-based analyst at Sun Hung Kai Financial Ltd. "For Alibaba
itself, how many large cap companies this size are going to get 51
That is impressive. And it should come as no surprise that the
smaller, more nimble Qihoo is growing at high double digits as
well, with projected 140% EPS growth in 2014 and 70% growth for
next year. So the question becomes "Can Qihoo keep it up and
compete for market share in these areas against the giants?"
Macquarie analysts believe the Qihoo App Store is currently the
biggest story at Qihoo with its app store having 30% market share
in terms of time spent, according to iResearch.
They note, "with the proliferation of apps and mobile games in
China and ongoing consolidation of the app distribution channel
(e.g. app stores), the balance of power is shifting to the app
store side from the developers. We don't believe the recent
announcement by Alibaba to take only 20-30% of revenue share
compared to the industry norm of 40-50% today will change the
industry dynamics as Alibaba does not have critical mass yet in
terms of the app store traffic."
The Search Question
With a forward P/E multiple now below 30X due to strong
quarter-after-quarter of growth, QIHU shares have seen quite a bit
of volatility in the past few months as investors and analysts
weigh how much of the search market they have. The drop from $120
to $90 has made the risk/reward much more attractive, trading 25%
above Baidu's valuation but with double the growth rate.
The company claims over 20% market share of search, but some
critics say it's probably lower and so not likely on a path to
achieving expectations of 30% share that the company projects is
possible by the end of this year.
But the Macquarie analysts don't see that as the big issue right
now. They figure it's a wide, yet growing, range of 15-25% search
share right now and leave it at that. Why so sanguine about this
Because they see Qihoo growing revenue share splits on search from
the current 2% to as high as 10%, "especially when it is launching
a new keyword bidding system in mid 2014." And this month brought
the launch of Qihoo's new mobile search engine.
All in all, the pace of innovation to serve more web users is
keeping Qihoo revenues growing at quite a clip. Jefferies analysts
project 2014's top line to hit $1.3 billion, 2015 to threaten the
$2 billion level, and 2016 to reach $2.7 billion. Here's a look at
that top-line growth trajectory which is growing faster than
Baidu's current $5.8 billion haul...
Qihoo has quickly become a major player in the Chinese web
ecosystem because they entrenched themselves as the reliable
must-have security provider. Now they just have to keep the bad
guys down, the traffic humming, and the innovations rolling to keep
growing at high double digits.
Disclosure: I own Qihoo 360 (QIHU) shares for the Zacks Follow the
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
Follow The Money
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