a Key Beneficiary of Qihoo Technology's Much Anticipated IPO

by: Xiaofan Zhang

Shares of (NASDAQ:SOHU) surged 7.81% on Tuesday, the most among all Chinese Internet stocks. I believe such strong performance was driven by investors' spill-over enthusiasm toward popular upcoming IPO Qihoo Technology (NYSE:QIHU), as the market eagerly searched for alternative ways to play the Qihoo IPO, which was priced 16% higher than the high-end of its originally planned range of $10.50 to $12.50 a share. Despite trading near its 52-week high, I believe SOHU still has plenty of upside ahead. Below is my analysis:

Similarity to Qihoo has led to SOHU's strong performance. At its core, Qihoo's business model is to offer advertising and value-added services around highly popular desktop client software such as 360 Safe Guard, 360 Anti-virus, and 360 Safe Browser. SOHU outperformed all peers on Tuesday because it offers the most similarity to Qihoo. In the past several years, Sohu has achieved great success in the area of desktop client software: Its market-leading Sogou Pinyin Chinese Input Method application has been installed in over 70% of China-based PCs. Its Sogou Browser has been downloaded to 12% of China-based PCs, and is the third most popular Web browser in China. Actually, Tencent (OTCPK:TCEHY) has been the most successful Chinese Internet company in desktop software, but its business in this area has matured and slowed down, and its market cap is much higher than that of SOHU and QIHU, which makes it a less attractive alternative Qihoo-IPO play than SOHU.

Still plenty of upside in the near term. A key difference between the Chinese and U.S. Internet markets is that desktop client applications have played a much bigger role in China than in the U.S. Impressed by Tencent's huge success surrounding the QQ Instant Messenger, investors now have very high expectations for Qihoo, a leading pure play in the desktop client area. Although Sohu has other businesses and only has partial exposure to desktop clients, I expect the short-term supply/demand imbalance in Qihoo shares will cause investors to chase after SOHU in the next several months. Therefore, I believe there is still plenty of upside for SOHU in the near future.

SOHU is a key Chinese Internet stock for the long term. In the long term, I think SOHU should be a key holding for investors looking to benefit from future innovations and emerging opportunities in China's promising Internet market. Since it was founded in 1996, Sohu's open-minded and diversified development model has enabled it to capitalize on virtually every new industry trend, including Online Brand Advertising, Wireless Value-Added Services, Online Games, Search, Online Video, and Desktop Client Software. As a result, Sohu shares have risen 589.23% since going public in July 2000. Based on such an impressive track record of getting exposure to "the next big thing," it's reasonable to expect Sohu to continue this winning streak in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.