Strong Demand for Qihoo 360 Technology's IPO

| About: QIHOO 360 (QIHU)
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The number three internet company in China (based on user base), Qihoo 360 Technology (NYSE:QIHU) shares opened up 86% at $27 in their IPO debut today. QIHU priced their 12.11 million share IPO at $14.50, well above the expected range of $10.50-12.50. All of the shares being offered are primary shares, which the company plans to use for development of new internet and mobile security products and services; for the enhancement of their research and development capability to further develop technologies; the acquisition of technologies, products or businesses; and for working capital purposes. The $14.50 IPO price values the company with a market capitalization of approximately $1.69B. The offering was led by UBS and Citi.

Founded in 2005, the company has grown rapidly through the offering of internet and mobile security products free of charge. They have grown their monthly active internet users from 122M in Dec. 2008 to 339M in Jan. 2011, representing a user penetration rate in China of 85.8%. They monetize this large user base through offering online advertising and internet value-added services. Their products and services are supported by their cloud-based security technology.

Competitors include anti-virus companies such as Beijing Kingsoft Security Software Co. and Beijing Rising Information Technology Co. Their biggest competitor in the value-added services and online advertising is Tencent Holdings (OTCPK:TCTZF), the largest instant message service provider in China. As of Jan. 2011, Tencent’s instant message software had a user penetration rate of 89.3%, while Qihoo’s 360 Safe Guard had a penetration rate of 76.9%.

Revenue has grown from $16.9M in 2008 to $57.7M in 2010. Online advertising service accounted for 67.3% of their total revenue in 2010. Google (NASDAQ:GOOG) was their largest customer in 2010, representing 21% of their total revenue. Net margin in 2010 was 14.7%, up from 12.9% in 2009.

While the few Chinese companies to come public in 2011 have had lackluster debuts (CDM, BCDS, TBOW, and ZA), many of the Chinese internet companies to come in the last 6 months of 2010 were some of the top performing IPOs of the year. This includes such names as CCIH, DANG, SFUN and YOKU, which were up between 73% and 161% on their first day of trading. With enormous demand on this offering (we are hearing books were north of 30x oversubscribed), QIHU joins the ranks of these other top performers on day one of trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in QIHU within the next 72 hours.