Zacks bull of the day: Qihoo 360

This company may become the next Internet search portal to take market share from the dominant Baidu.

By Zacks.com Sep 24, 2013 4:43PM

Image: Businessman in China (© Brooklyn Production/Corbis)By Kevin Cook

 

Looking for the next Internet search portal to take market share from Baidu (BIDU)? Look no further than Qihoo 360 Technology (QIHU).

 

Qihoo 360 is the largest Internet security provider in China, with more than 461 million monthly active users, representing a penetration rate of 96% in arguably the world's largest Web market.


That's right. You are talking about the largest common-language/culture Internet market in the world, and QIHU is now the No. 2 portal.

 

With that kind of access to the Chinese market, why haven't we heard of this $7 billion upstart before as a threat to Baidu? And where does the search element come in?


The story is out

Qihoo 360 Technology offers a broad spectrum of Internet and mobile security products, including 360 Safe Guard and 360 Antivirus, 360 Mobile Safe, 360 Safe Browser, 360 Personal Start-up Page, 360 Application Store and 360 Safebox.


In a brilliant strategy move, Qihoo 360 began offering its cloud-based Internet security products for free to users. And this has allowed it to monetize its significant audience through online advertising services, including paid links as well as Internet value-added services, such as offering access to third-party Web games and virtual items.


More recently, the launch of So.com, its Internet search engine, is the game-changer for the company as it leverages its broad reach in China to capture lucrative search market share. The "360" brand stands for Internet security to the company's users, and these users are a ripe audience for advertisers.


Take a look at how savvy (and China-connected) investors tripled QIHU shares in the past five months after the launch of So.com, once they realized the growth potential.


Mobile search and gaming

Earlier this month, the company launched 360 Yingshi Daquan, the mobile version of 360 Video, Qihoo’s video vertical search engine. The mobile app enables users to search for and view videos from Qihoo partners on Android-based smartphones.


Like Qihoo's 360 Mobile assistant, the new app will serve as a mobile traffic hub for the company, attracting users who ultimately can be monetized by the company. According to the China Internet Network Information Center, during the first half 2013 there were 160 million Internet users accessing online video using mobile devices in China, a 34.4% utilization rate. As mobile devices evolve with new technologies including larger screens, video will continue to be in great demand among mobile users.


What else do Chinese PC and mobile users rely on Qihoo 360 for? Gaming. Here's how one analyst characterized the growth potential:

"We believe Qihoo possesses a solid mobile search entry point supported by the strong distribution capability of its app store, which is ranked No. 1 with 21.6% market share by number of times used in July, according to iResearch. For example, number of downloads of "Plants vs. Zombies 2" reached 10mn in 36 hours on 360 mobile assistant, compared to 25mn downloads in two months on iOS app stores."

Rich valuation, compelling opportunity

There is no doubt that QIHU shares ran quickly to near-full valuation (average analyst target price is $100) once the story was out that the company was grabbing significant search engine traffic from Baidu. The leader currently owns over 60% of the market, while the newcomer is pushing 20%.


I recommended this stock three weeks ago in the low $80s as an aggressive growth and trading opportunity. It traded back above $90 and has since come off a bit. For investors, keep an eye on the earnings momentum. After the last earnings report, which beat consensus estimates by 100% (just like the previous three quarters!), analysts bumped earnings estimates next year from $1.26 to $1.55 a share -- that's 80%-plus year-over-year growth.


At $85, that's also a forward price-to-earnings ratio of 55X. But if the aggressive growth trends of QIHU keep muscling in on Baidu's turf, this company may sustain that multiple.


Kevin Cook is a Senior Stock Strategist for Zacks, where he runs the Follow The Money portfolio.


To read this article on Zacks.com click here.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
262
262 rated 2
480
480 rated 3
651
651 rated 4
649
649 rated 5
629
629 rated 6
616
616 rated 7
496
496 rated 8
346
346 rated 9
111
111 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION9
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.