Qihoo Takes Market Share From Baidu As Growth Accelerates

Nov.25.13 | About: QIHOO 360 (QIHU)

Qihoo 360 (NYSE:QIHU) delivered Q3 earnings and revenue ahead of estimates, and guided for Q4 revenue above analyst expectations. Revenue growth accelerated to 124% on increased monetization in all of its segments, and a significant ramp-up in search monetization. Qihoo gained search market share ahead of expectations, and the company already achieved the year-end traffic share goal. I am confident in the company's future prospects, and believe that Qihoo's share price will continue to outperform Baidu (NASDAQ:BIDU) in the next couple of quarters.

Q3 highlights

Qihoo reported adjusted earnings per share of $0.47, ahead of analyst estimates for $0.37, and 135% higher than Q3 2012. Revenue increased 124% to $187.9 million, $6.1 million above consensus estimates. This was the second consecutive quarter of revenue growth acceleration, after 58% revenue growth in Q1 2013 and 108% in Q2. Non-GAAP operating and net margin expanded 750 and 390 basis points to 35.5% and 32.7% respectively over Q3 2012.

Earnings and revenue beat are the result of broad strength of all of the business segments. Online advertising revenue increased 107% to $120.7 million on increased monetization and further development from both search and mobile monetization. Management noted that Qihoo's search market share already reached the year-end target. Internet value-added services revenue grew 163% year-over-year on strong momentum in mobile games, with solid growth in paying games user base and an expanded games portfolio.

Some of the other important metrics in Q3 include:

- User penetration of Qihoo's PC-based products was 94% in September 2013, compared to 95% in September 2012.

- Total smartphone users of 360 Mobile Safe reached 408 million in September 2013, compared to 149 million in September 2012.

- User penetration of Qihoo 360's browsers was 69% in September 2013, compared to 65% in September 2012.

Qihoo had over $1 billion in cash and equivalents at the end of Q3. Cash balance increased significantly due to strong operating cash flow in the quarter and the net proceeds of the note offering, which accounted for the most of the increase. Given the company's already strong cash position, the company will probably use the cash to make an acquisition.

Taking market share from competitors

According to CNZZ, a third-party internet data research firm, Qihoo's search market share in October was 23% in terms of number of unique visitors. This is a 4% increase over the September numbers. The increase comes at the expense of its competitors: Baidu, Sogou (NASDAQ:SOHU), and Tencent's (OTCPK:TCEHY) Soso. Qihoo now also has the largest Android-based app distribution platform in China, with 29% market share, ahead of Baidu's 24% and Tencent's 6%.

Qihoo will continue to outperform Baidu

Qihoo is up 178% year-to-date, while Baidu is up 56%. While I believe that both stocks have great growth potential in the future, I still believe that Qihoo's share price will outperform Baidu in the next 6-12 months. This is based on the strong earnings and revenue growth momentum, as well as market share gains over Baidu and Qihoo's leading position in the mobile segment. Although Qihoo is trading at a significant premium over Baidu, the valuation seems more than justified when you compare the growth levels.

QIHU Chart
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QIHU data by YCharts

Company EPS Growth Q3 EPS Growth Q4 (Est.) Revenue Growth Q3 Revenue Growth Q4 (Est.) Earnings growth 2013 (Est.) Earnings Growth 2014 (Est). P/S (TTM) Forward P/E
QIHU 135% 91% 124% 116% 61% 64% 18 38
BIDU 1% 21% 42% 43% 4% 25% 12 23
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I remain positive on Qihoo, and believe that it will outperform Baidu in the next 6-12 months. Qihoo's growth rates outpace Baidu's, and its search market share gains and the leadership role in the mobile segment position the company to grow ahead of Baidu in the future. Earnings and revenue are growing ahead of expectations, and the company is executing its growth strategy very well. Strong cash balance and the note offering may be used for a meaningful acquisition in the near term and might serve as another catalyst for further price appreciation.

Disclosure: I am long QIHU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.