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Summary

  • Qihoo is fast establishing its dominance in the Chinese Internet market with its strong product portfolio.
  • Qihoo has successfully challenged market leader Baidu for market share in the search space.
  • Qihoo's monetization strategies and rapid growth rate make it an attractive investment.

Qihoo 360 Technology (NYSE:QIHU) has been one of the fastest-growing stocks in recent times. Qihoo's shares have risen more than 200% in the last one year, as the Chinese Internet company has reported rapid growth. Just recently, Qihoo reported its twelfth consecutive quarter of strong growth. The company is engaged in a fight with market leader Baidu (NASDAQ:BIDU) to establish its dominance in the Internet industry in China, and it seems to have done well so far.

Growing its dominance

Qihoo has expanded its leading position in key product categories, and has made significant inroads in new markets. Its monthly active users of PC-based products and services, which cover 94% of the Chinese PC Internet population, have increased to 475 million at the end of 2013.

Also, with around 467 million smartphone users for its flagship mobile security product, Qihoo covers approximately 70% of the Chinese smartphone market. So, Qihoo is a fast-growing player in Internet security in China. In addition, monthly active users of its PC browsers are now at 354 million, representing over 70% of the Chinese PC Internet population. Going forward, Qihoo is allocating significant resources to tap the fast-growing mobile Internet market, and is also strengthening its position in the PC Internet market.

Qihoo now enjoys 23% of the search traffic in China, substantially exceeding its own internal target. Now, Qihoo is in a solid position to increase its share in China's search market through continued product improvements and technological innovations.

Monetization moves

Qihoo began monetizing its search and mobile products last year, and within a short time, it has made significant progress. The combination of search and mobile monetization should drive substantial long-term growth for Qihoo, since the mobile market is growing at a fast pace.

Strength of the monetization process and incremental contribution from search and mobile monetization has resulted in strong online advertising growth for Qihoo, as advertising was up 88% in 2013 as compared to 2012. Also, Internet value-added services are gaining steam, with PC games and a strong ramp-up in mobile games outpacing the market with strong revenue growth. Qihoo's search and mobile monetization are in their nascent stages, so the company is seeing faster ramp-up in these segments.

Similarly, Qihoo's gaming platform is also seeing strong growth. Qihoo's total number of paying gaming accounts grew to approximately 700,000 in the fourth quarter of 2013, as compared to 560,000 in the prior quarter. Qihoo has over 800 games running commercially on its game platform, and this is yet another area that's driving the company's growth.

Also, Qihoo is making fruitful investments in product and technology development to strengthen its leadership position and expand its footprint, particularly in mobile Internet and search, where there is strong opportunity for future expansion. Meanwhile, Qihoo will continue building its sales and marketing infrastructure to provide support to such enhanced monetization efforts. Such investments should strengthen Qihoo's foundation and help support the growth momentum, and drive long-term growth.

Better than Baidu

Qihoo is engaged in a spending war with China's search leader, Baidu, to capture a bigger market share on both PCs and mobile devices. According to CNZZ, a Chinese research firm, Qihoo's market share has grown to 24.9% of the market in China, while Baidu's has fallen to 58.3%. Just last year, Baidu commanded a 70% share of the Chinese search market, but that has steadily fallen. As Qihoo continues to make more moves in the Chinese search market, Baidu could see its shares tumble further.

What's more, Qihoo has successfully managed to monetize its desktop search engine. Desktop search accounted for about 30% of Qihoo's business at the end of 2013, and since the company has continued to report strong gains in market share, this business should grow further.

From a valuation perspective, there's no doubt that Qihoo is more expensive when compared to Baidu. Qihoo trades at a trailing P/E ratio of almost 120, while Baidu trades at 32 times earnings. But, on a forward P/E basis, Qihoo's P/E ratio comes down substantially to less than 24. The same is true for Baidu as well, with a forward P/E ratio of just 3.4. However, Baidu's earnings fell slightly in the previous quarter as a result of the various investments that it made.

On the other hand, Qihoo's revenue was up a massive 115% in the previous quarter, with earnings growth coming in at an impressive 30.60%. Hence, even though Qihoo is more expensive, its premium is justified, since the company is growing at a rapid rate.

Conclusion

Qihoo has reported rapid growth so far on the back of investments in its various intellectual properties. Its moves have led to strong growth in its business, along with solid share price gains. Going forward, Qihoo is looking to maintain this momentum, and this should lead to market share gains. Hence, investors should consider investing in Qihoo, as it looks like a solid investment and definitely a stronger buy than Baidu that's losing market share.

Source: Qihoo Is A Better Buy Than Baidu, Here's Why