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Qihoo 360's Increasing Domination of the Chinese Search Industry Makes It a Buy

June 05, 2014 | About:
Rustic Nomad

Rustic Nomad

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Qihoo 360 Technology (QIHU) has made some solid progress in the Chinese internet industry. And now it is giving tough competition to its peers such as Baidu. In fact, it has been able to take some of its market share and is now competing with Tencent in the gaming market as well. It would be a matter of time to see whether Qihoo will continue with its solid performance or be subdued by its peers.

Strong Performance

Qihoo has grown at a considerably fast pace. Its revenue for the fourth quarter increased 115% to $221.6 million from the year ago period. This was more than the analyst estimate of $209 million. Its earnings increased 218% to $0.70 per share as compared to last year. This has again outpaced the analyst’s estimate of $0.43 per share.

Qihoo's growth is mainly on account of the strategic decisions taken by the company to strengthen its mobile security and mobile app store products. Currently, Qihoo has an active user base of 475 million and enjoys a dominating position in the Chinese internet industry. In addition, 70% of China's active PC internet users use Qihoo's PC browser. Qihoo is also a leader in smartphone security in China with 70% market share.

The Road Forward

Going forward, management believes that it will have a leading position in Android-based app distribution in China, which will boost its results. Currently, Qihoo leads this market and enjoys more than 40% of the market share. Its search engine has also gained traction hitting a market share of 23%.

This is indeed a big achievement for the company since at one point of time, Baidu was the dominant player in the search industry in China. According to research firm, CNZZ last year Baidu had around 70% market share, which has now come down to 58%. And looking at the current growth pace of Qihoo, Baidu’s share might fall further. To strengthen its position further Qihoo has already launched a few mobile search related products.

Gaming Moves

We have already seen that Qihoo is giving tough competition to Tencent in the gaming market. Qihoo's game platform is attracting game developers and users in good numbers. Currently it runs around 800 games on its game platform and is adding subscribers continuously. According to the latest statistics at the end of the fourth quarter, Qihoo had around 700,000 paying gaming accounts as compared to 560,000 in the prior quarter. And with the increasing gaming market in China Qihoo should see further improvements in its numbers.

However, beating Tencent in the gaming market is not an easy game. Currently Tencent is the biggest game operator in China. In fact according research firm Newzoo, Tencent is the world's biggest company in terms of game-related revenue.

Tencent's QQ Games portal was a big success and now the company is extending its reach through its popular WeChat messaging service. The WeChat client also distributes digital games and currently has around 300 million registered users in China. Although Qihoo displayed solid growth but still looking at the numbers Tencent still leads the Chinese gaming industry and Qihoo has to go long way before it takes on Tencent.

Conclusion

Currently, Qihoo has a trailing P/E of 114, which is highly expensive, but its forward P/E looks attractive at 23, which indicates its rapid earnings growth. Qihoo has indeed delivered some solid earnings growth in the past and considering its growing dominance in the Chinese internet industry, its growth could continue in the future as well. So, considering these factors Qihoo might be a good option for investors.


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