Since outlining the reasons behind the risks and rewards of Qihoo (NYSE:QIHU) on 1/26/2014 in a previous article, it has since gained a respectable 20%. Instead of waiting for its upcoming earnings release in early March, investors have decided to push the stock price higher. I will very briefly state four reasons why investors could look forward to another earnings beat.
Four Reasons For An Earnings Beat
1. Qihoo has beat earnings for the last four quarters. Three of the last four earnings had beat by 100% or more. This is primarily the reason which fueled its 234% rise in the last eight or so months. Although much of the growth has already been priced in, with a 20% or so market share there is still room for growth in the context of the three other reasons stated below.
2. The Chinese economy is still growing at a 7.8% clip. It's easier to see this on the ground with more railways being built, subways, roads and buildings. The demands for energy and cars certainly isn't stopping. With an $8 trillion dollar economy growing at that pace, at least on paper, lots of capital is shifting hands or being created. It's not out of the question to see capital flowing out of other emerging markets, or places like Southern Europe, to China due to its low cost manufacturing, relative stability, position relative to the economies of South Korea and Japan and anticipation for future growth which pushes assets higher. Let us not forget that at least a part of China's foreign currency reserves can be used to stimulate the economy but certainly not all of it.
3. China's internet user growth, particularly its 3G subscribers, is booming. In another article, I outlined the reasons behind Baidu's (NASDAQ:BIDU) potential growth in China. With around 49% of the country using the Internet, there is room to grow. With more added users and a similar business model, as partly an Internet marketing agency, Qihoo's services increase in value as more participants are added on. Things like tracking and storing data of consumers and their habits has value to other businesses that would like access to that information so they can advertise more efficiently. With 3g subscribers growing 79% in 2013, this is important for Qihoo because not only does it add more traffic to its servers, but it broadens the reach of its advertisements to the rural sectors of the economy where people are not internet users. Since in many places the infrastructure is not built yet to support a landline which allows for internet use, they can surf the web using their mobile devices which may be cheaper. In addition, Apple (NASDAQ:AAPL) was recently added to China Mobile, targeting its 700 million customers. Many of them were waiting to buy an iPhone along with an internet subscription after saving up their hard-earned money.
4. Seasonal holiday trends support more use of Qihoo's services. With the holidays - New Year's along with Christmas, which is celebrated in many parts, more people are using their mobile devices to pass time as they travel back home to celebrate the New Year festivities.
A Brief Conclusion
With a decent moat, Qihoo has done well in the previous year. It is rather hard to duplicate Qihoo's business model since search engines require the technical capabilities and necessary servers in order to maintain the business. It has also taken on a niche market of providing computer security from viruses.
The big question is how much longer will Qihoo's growth continue? More importantly, will the stock price keep going up? In the context of the four points outlined above, there is a decent risk-reward ratio. Even though there is always uncertainty, either investors have set up Qihoo to have a precipitous drop after earnings, or they see potential for its ongoing growth in the context of a developing economy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in QIHU over the next 72 hours. 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.