Qihoo 360 Fights Back

Noted worrywart Citron Research skewered Qihoo 360 (NYSE: QIHU  ) yesterday, but the leading Chinese provider of Internet and mobile security solutions is clawing back at the bear.

Calling it "the most overvalued and misunderstood Chinese Internet stock," Citron's bearish attack accuses the company of overstating its popularity when Qihoo 360 refers to itself as China's third most popular Internet company given its user base of 378 million monthly active users.

In setting a price target of $5 for Qihoo 360 that it later admits may be generous, Citron also attacks the CEO's past and the company's claims of being a legitimate player in mobile security, and argues that Qihoo 360's valuation is ridiculous when pitted against the much larger and established dot-com pioneer Sohu.com (Nasdaq: SOHU  ) .

Citron will get no argument out of me on the Sohu point. I also argued that Sohu is ridiculously cheap this week.

However, after successfully nailing Chinese mobile apps specialist Sky-Mobi (Nasdaq: MOBI  ) -- and seeing the stock shed more than two-thirds of its value since its bearish rant -- Citron may be biting off more than it can chew here with Qihoo 360.

Qihoo 360 fired off a rebuttal last night. It doesn't necessarily address the spyware allegations of the CEO's past. And it rightfully sidesteps any valuation debates. However, Qihoo 360 effectively counters some of Citron's other knocks.

On the mobile security front, Qihoo 360 points out that its 360 Mobile Safe product has been on the market for two years and now has more than 20 million active smartphone users.

Qihoo 360 saves its best zingers for the popularity claims.

Citron's case for debunking Qihoo 360's user base stemmed primarily from the Web traffic at Qihoo's 360.cn website. Citron relied on Google's (Nasdaq: GOOG  ) DoubleClick ad planner and Amazon.com's (Nasdaq: AMZN  ) traffic tracking Alexa.com to show that 360.cn is certainly not the third most visited website in China. Search giant Baidu.com (Nasdaq: BIDU  ) and IM titan QQ.com are the two top sites, but 360.cn checks in at 21 through Google and 35 with Alexa.

Qihoo argues that its security solutions are primarily desktop applications. Its more than 370 million active users have no reason to visit its website regularly. It also claims that it doesn't use DoubleClick banner ads, so the ad planner's stats will not be accurate anyway.

Then it makes Citron look silly by pointing out that Alexa measures traffic through toolbar plug-ins running on user computers. As a security product, one of the key features of Qihoo 360 is that it erases unnecessary plug-ins. In other words, its user base will be obviously be undercounted through Alexa.

We'll see if there's a second round of the fireworks. There have been plenty of Chinese companies that have come undone as the result of stateside bearish attacks over the past year. Qihoo 360 isn't cheap by most measuring sticks, but it's also shown it's not going to be a shrinking violet if its business is inappropriately attacked.

If you want to follow the ups and downs of Citron's bearish targets, add Qihoo 360 and Sky-Mobi to My Watchlist.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Amazon.com, Baidu, Sohu.com, and Google. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (7) | Recommend This Article (5)

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  • Report this Comment On November 02, 2011, at 3:26 PM, Medicalrecordman wrote:

    QIHU's response to Citron on its website was beyond lame. Even the cheesiest of China small-cap reverse mergers puts up a better fight than a token reply. Valuation ? People rightfully think AMZN is valued like it's in orbit ? Doesn't hold a stick to QIHU's kool-aid barometer. And Citi coming out this morning with a $39 target ? ROTFLOL. Who are the lemmings that drink that kind of kool-aid ?

  • Report this Comment On November 02, 2011, at 4:49 PM, goldminingXpert wrote:

    "Then it makes Citron look silly by pointing out that Alexa measures traffic through toolbar plug-ins running on user computers. As a security product, one of the key features of Qihoo 360 is that it erases unnecessary plug-ins. In other words, its user base will be obviously be undercounted through Alexa."

    Alexa is not "an unnecessary plug-in". Alexa is something users voluntarily download that would not randomly pop up nor would it likely be blocked by a security product.

    Citron's research is exceptionally accurate. You are fighting an amazing stock picker if you take the opposite side of Citron's bets: http://seekingalpha.com/article/251981-a-comprehensive-score...

    And yes, I have a short position in QIHU.

  • Report this Comment On November 02, 2011, at 5:01 PM, cthomas1017 wrote:

    qihu could have 7 billion users, every person on earth, but if they generate zero revenue on all those users, it's a dot-com bubble business model.

    So go long on qihu and party like it's 1999!

  • Report this Comment On November 04, 2011, at 5:36 PM, Mega wrote:

    "As a security product, one of the key features of Qihoo 360 is that it erases unnecessary plug-ins."

    It's rather Orwellian to call it a "security product" if it's really malware that deletes legitimate, opt-in plugins like Alexa.

  • Report this Comment On November 04, 2011, at 5:40 PM, Mega wrote:

    Basically you have to trust Qihoo that 370M people use their software, because there is no possible way to prove it. Least of all the revenue generated by serving all those people.

  • Report this Comment On November 15, 2011, at 10:11 AM, eperson wrote:

    Citron is really foolish here. btw, Qihu does not automatically delete anything, it prompt you as IE 9 does to let you decide delete it or not. Most plug-in is not shown but it's not neccessary for most of people. that'is. Qihu has good product and MILLIONS of people are using it to increase productivity. download one and test for yourself. don't be stupid and allegate without proof. take care

  • Report this Comment On December 13, 2011, at 8:57 AM, supereight8 wrote:
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