Time To Load Up On Qihoo?

| About: QIHOO 360 (QIHU)


Qihoo seems to have digested its move down in the last couple of months and might be ready to rally.

The company has done a note offering which means that a major acquisition may be in the making.

Comparing Qihoo’s valuation to Baidu's reveals which stock has potential for more gains in the next couple of months.

Qihoo 360 (NYSE:QIHU) is still consolidating after the strong selloff in the March-May period. On March 10, I suggested that it may be time to sell Qihoo and buy Baidu (NASDAQ:BIDU) as Qihoo was extended at the time, and as I thought that Baidu presented a better opportunity to profit in the next couple of months. In early May, I revisited my thesis and said that it is time to buy both Qihoo and Baidu, as their upside potential was roughly the same and as both companies are benefiting from the strong momentum in their businesses. Both stocks bottomed a few days after I wrote the article, although Qihoo has not performed as well as Baidu.

While I am maintaining my buy ratings on both stocks, I believe that Qihoo should outperform in the next couple of months. The company is due to report earnings in late August and the recent note offering suggests that a major acquisition is in the making, and both events may serve as strong catalysts for the share price in the next couple of weeks or months. Qihoo also has more upside potential than Baidu when we compare the growth and valuation of the two companies.

Two potential catalysts are coming

Actually, one catalyst is coming up that we are sure about, and that is the Q2 earnings report. The company is expected to report earnings in late August (no exact date is specified yet), and the report will likely determine the short-term price movement of the stock. I believe that the company should continue to deliver revenue and earnings above analyst estimates and provide guidance above views, which was the case in at least the last four earnings reports.

On the other hand, the company has done a large note offering a few days ago, raising $900 million for "general corporate purposes." This might be another catalyst for the stock, as the company might do a large acquisition since it already has $900 million in cash and equivalents and does not need the funds for regular day-to-day business activities. I do not want to speculate about potential candidates, but the note offering is a clear indication that something is being done in that area and is most likely related to the mobile business.

Valuation favors Qihoo at the moment

When I wrote about Qihoo and Baidu in early May, the upside potential for both companies was roughly in the same ballpark. I said that both stocks could rise between 50% and 70% in the next six to twelve months, while Qihoo could rise more than 100% in the bullish scenario. Since the article was published, Baidu is up 35% while Qihoo is up just 7%. The rise in Baidu's share price has shifted the reward/risk ratio in Qihoo's favor. In my latest article on Baidu, I noted that further upside is possible, and that the stock could reach $300 by the end of the year. Baidu's potential upside is between 30% and 50% right now, although the stock might be vulnerable to a pullback after such a strong run in the last two months.

On the other hand, Qihoo has consolidated in that time and may be ready to rise. A look at the valuation in the table below leaves me with the conclusion that Qihoo should outperform in the next couple of months. Qihoo's growth figures and forward expectations are above Baidu's, and its forward valuation is lower than Baidu's. I still believe that Qihoo might be a double from here in the next six to twelve months, especially if the company's strong business momentum continues in the next couple of quarters.

Source: Yahoo! Finance


I am still bullish on both Qihoo and Baidu, but I think that Qihoo should outperform in the next couple of months, based on higher growth prospects and a lower forward valuation. Qihoo's Q2 earnings are coming up in three weeks and the company has done a note offering, raising $900 million, which it might use for a large acquisition very soon. Qihoo's upside potential could be north of 100% in the next six to twelve months while Baidu's upside is more in the 30% to 50% range, making Qihoo a better opportunity at the moment.

Disclosure: The author is long QIHU. The author wrote this article themselves, and it expresses their own opinions. I may initiate a long position in BIDU in the next 72 hours. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.