If you thought that the days of Chinese dot-coms with blazing-fast growth were history, warm up to Qihoo 360
The provider of Internet and mobile security solutions and other Web products posted another blowout quarter last night. Revenue soared 202% to $69.3 million. Earnings before stock-based compensation expenses rose 291% to $25.7 million, or $0.21 a share. Analysts were only banking on an adjusted profit of $0.17 a share on $60.5 million in revenue, but what else is new? Qihoo had beaten Wall Street's bottom-line targets by 33% or better in each of the four previous quarters.
If anything, it's coming off as a slacker for only landing 24% ahead of the hapless prognosticators.
Qihoo laughs last, laughs best
Qihoo may not be a household name outside of China, but it reaches a whopping 411 million monthly active users through its anti-virus solutions, market-leading Internet browser, and gaming initiatives. That's a whopping 93.4% of China's Internet users, for those scoring at home.
Qihoo's browser -- the top dog in China -- had 273 million active monthly users in March, giving Qihoo 62% market penetration. The browser was only reaching 48% of China's Internet users a year ago.
The success of its 360 Personalized Start-up Page -- a home page solution that's growing quickly in popularity -- is attracting a daily average of 295 million clicks, well ahead of its average of 112 million a year earlier.
Roll call
Investors have been treated to reasonably upbeat first quarters by many of China's slower-growing Internet companies earlier this earnings season. The dagger has been when these companies discuss their near-term outlooks.
Last week it was online portal SINA
Would Qihoo follow suit? Not this time. Qihoo sees revenue more than doubling to between $72 million and $73 million, well above the $67.3 million that the market was forecasting.
Despite Qihoo's ridiculous growth, the kicker is that the stock closed yesterday at less than 17 times next year's projected earnings.
How can that be? Well, some skeptics feel that Qihoo's growth is too good to be true.
Lemon aid
Citron Research -- the noted worrywarts with a strong track record in nailing Chinese companies with accounting issues -- skewered Qihoo last year.
Citron called Qihoo "the most overvalued and misunderstood Chinese Internet stock" at the time, suggesting that even Citron's own $5 price target on the stock was generous. It claimed that Qihoo was overstating the popularity of its products and that its CEO had a spyware-shackled history.
Qihoo fought back. Citron argued that Qihoo's products weren't popular because its website was not generating the kind of traffic that would make Qihoo the country's third-largest website operator outside of Baidu and IM and gaming titan QQ.com. Qihoo argued that its security solutions are primarily desktop applications that don't require repeat visits to the website. More to the point, Qihoo's software encourages users to zap unnecessary toolbar plug-ins that tracking companies use to measure traffic.
Sohu's your daddy
Back in November, Citron pitted Sohu.com
Both companies carried similar market caps, but it's not fair to compare a fast-growing speedster with a somewhat mature portal. Sohu is cheap, but it's also at a different place in its growth trajectory. Revenue at Sohu grew 30% in its latest quarter, but profitability was cut nearly in half as bandwidth and content costs on the brand advertising side are crushing margins.
Keep in mind that Qihoo's revenue more than tripled -- with adjusted earnings nearly quadrupling -- during the same period.
Sohu is attractive, fetching 11.5 times next year's projected earnings, but who can deny the attractiveness of the much faster growing Qihoo at 16.6 times next year's estimates?
One more lemon shot
Citron fired again in March, pointing out that one of Qihoo's independent directors -- the head of the company's audit committee, no less -- was also a director in a Hong Kong apparel company where Deloitte had recently resigned. The implications were saucy, but a few weeks later Deloitte signed off on Qihoo's financials and relieved investors bought back in.
Qihoo investors are scaling a wall of worry here, but once again the security specialist secures another blowout quarter that will -- at least temporarily -- silence the skepticism.
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