A Chinese Technology IPO That's Actually Earning Money

Investing in companies that are across the world, operating in a business climate altogether alien to the average U.S. investor, is a scary proposition.

It gets even more nauseating for an investor's stomach given the U.S. debt downgrade, sovereign debt crisis in Europe, and fears of a slowing economy in China. But there is one company that's -- at least over the very short term -- rewarded investors with impressive numbers: Qihoo 360 (NYSE: QIHU  ) .

Off to a rough start
This month hasn't been kind to those who have taken the leap of faith to invest in newly IPO'd technology companies coming out of China. Take a look at the valuations each of these companies sport, along with their performance over the rough month of August.

Company

Earnings Per Share

Forward P/E

August Performance

Qihoo 360

($0.06)

53

2%

Renren (NYSE: RENN  )

($0.85)

180

(34%)

Dangdang (NYSE: DANG  )

$0

115

(30%)

Youku.com (NYSE: YOKU  )

($0.38)

1,167

(37%)

Tudou (Nasdaq: TUDO  )

($3.25)**

N/A

(9%)*

Sources: Yahoo! Finance, Google Finance. N/A = Analyst estimates not available.
*Tudou IPO was Aug. 18.
**Tudou loss is divided by four shares per ADR. The absolute loss at Tudou is $103.29 million over the last 12 months.

Surging revenue, but no profits
Truth be told, I'm not saying these other four companies belong in the trash. Social-networking site Renren and e-tailer Dangdang each saw revenues climb 53% last quarter. But in the case of Renren, costs from sales, marketing, and G&A offset its top-line growth. And for Dangdang, much of the growth was attributable to lower-margin offerings that added little to the bottom line.

The Hulu and YouTube of China
Youku -- which like Hulu plays licensed content streaming over the Internet -- saw revenue grow by an astounding 178% last quarter. Sadly for the company, though, the costs for bandwidth and content licensing alone ate up 59% of those surging revenues.

And Tudou -- which like YouTube mostly offers content that is uploaded by registered users -- is just a little over a week old as a publicly traded company. Though the company receives and posts 47,000 videos daily, its net income was negative $103 million over the last 12 months. We'll have to wait until Tudou's first public earnings release comes out next quarter to see if we should be taking this company seriously.

A move to profitability
Qihoo 360 offers two products to the market. The first is Internet security software, which it has begun to give away for free. The second is a Web browser akin to Firefox, Safari, or Internet Explorer. The company makes its money by offering Internet value-added services on open platforms and through advertising.

Qihoo was able to avoid such stumbles in share price because of an absolutely astounding earnings report. Nearly all measurable metrics were up significantly, but more impressive is that revenue and operating income growth were able to outpace the growth in costs.

 

Q2 2010

Q2 2011

Change

Revenue

$12.7

$35.1

176%

Net Income

$2.2

$11.1

405%

Net Margin

17%

32%

15 percentage points

Source: Company earnings release. Dollar figures in millions.

The enormous expansion of margins, which almost doubled, shows that as Qihoo continues to scale up, it'll be able to keep a larger share of every dollar it earns.

But perhaps most importantly is that the company is now consistently making money, something that can't be said for all of its other Chinese IPO brethren.

A word of caution
Before rushing out to buy shares of Qihoo 360, which I myself own, I have a word of caution. While talking over my purchase of Qihoo with fellow Fool and head analyst at Motley Fool Global Gains, Tim Hanson, he shed some light on to the situation with the management.

Said Tim: "We've heard some very interesting stories about this company. One observer, for example, called it a company 'founded on pure evil.' " Tim said the main objection is to Qihoo CEO Hongwei Zhou and his questionable practices in creating programs with malware and with his defection from Yahoo!'s China branch.

With so many reports of corporate malfeasance coming out of China, Tim's warning didn't go on deaf ears: My stake in Qihoo, though walloping the market by 31%, represents less than 1% of my overall portfolio.

If searching for the next great IPO gets your blood pumping, then consider taking a look at the Motley Fool's newest special free report: "The Hottest IPO of 2011." Inside, you'll find out about a company that promises to have a huge presence in the international consumer goods market. The report is yours today, absolutely free!

Fool contributor Brian Stoffel owns shares of Qihoo 360. The Motley Fool owns shares of Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 02, 2011, at 3:23 PM, Mega wrote:

    " 'One observer, for example, called it a company 'founded on pure evil.' Tim said the main objection is to Qihoo CEO Hongwei Zhou and his questionable practices in creating programs with malware and with his defection from Yahoo!'s China branch."

    Definitely buried the lede with this article. No wonder QIHU is performing poorly.

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