Update: Qihoo Q2 Earnings

Aug.25.14 | About: QIHOO 360 (QIHU)

Summary

Qihoo reported Q2 earnings and revenue ahead of analyst estimates.

Management guided Q3 revenue above views.

The company reached 30% search market share four months ahead of schedule.

Reiterating my bullish view on Qihoo with substantial upside potential.

Qihoo (NYSE:QIHU) reported Q2 earnings and revenue ahead of analyst estimates. Second quarter revenue was up 109.6% to $317.9 million. Non-GAAP EPS was up 25% to $0.50. The company has significantly increased sales and marketing spending which had a negative effect on margins. Non-GAAP net margin in Q1 was 21.8%, compared to 33.6% in Q2 2013 and 27.7% in the first quarter of 2014. Management guided Q3 revenue between $360 million and $365 million, representing a Y/Y increase of 92% to 94%. The mid-point of the guidance is $5 million higher than the current consensus.

Online advertising revenue increased 89% Y/Y to $171.3 million. The strong growth was driven by search and mobile advertising and increased monetization of user activities on 360 Personalized Start-up Pages. Internet value-added service revenue was up 140% Y/Y to $146.2 million. The growth was driven by both PC and mobile games. The growth in both segments decelerated from Q1, when online advertising revenue grew 141% and internet value-added services revenue was up 172%. Qihoo is also taking more search market share from Baidu (NASDAQ:BIDU). CNZZ reported last week that Qihoo's search market share is now 30.2% in terms of page views. That means that Qihoo is four months ahead of its year-end search market share target. Baidu's share is now 54.5%, down from 67.7% a year ago.

Although we did not see a blowout quarter, which was the case in Q1, the results are still quite good and complement my previous bullish thesis. I am reiterating my bullish view and I believe that Qihoo can rise significantly in the next six to twelve months. The company has just started to monetize search, and the growth in the mobile segment is in the early stages. The massive expected growth in the future should translate into a significantly higher share price going forward. Analyst expectations should rise on higher Q3 guidance and we might see upgrades and/or raised price targets, which might move the stock higher in the next couple of weeks. And as I said in my previous article, the latest note offering and a substantial cash position might be used for a large acquisition which might also push the share price higher. Qihoo's growth and future expectations are higher than Baidu's, but the two companies are currently trading at the same forward 2015 P/E. I am bullish on both Qihoo and Baidu, but I believe that Qihoo should outperform Baidu in the next couple of months.

Disclosure: The author is long QIHU.

The author wrote this article themselves, and it expresses their own opinions. 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.

Additional disclosure: I may initiate a long position in BIDU in the next 72 hours. 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.