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Qihoo in 2013: A Year in Review

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Qihoo 360 (UNKNOWN: QIHU.DL  ) investors aren't doing a whole lot of complaining in 2013. Shares of the Chinese dot-com speedster are up 172% this year.

Last year's 89% pop wasn't a fluke. Qihoo 360 has been able to parlay its market-leadership position in Web browsers and online security into a search engine that has gained ground since its launch two summers ago.

Qihoo 360's surprising strength in search initially weighed on niche leader Baidu (NASDAQ: BIDU  ) , but both stocks have managed to thrive in this climate. Baidu shares have also had a market-thumping 2013, with its stock up 68% this year, validating my recommendation last year that investors should just buy both instead of trying to single out a lone victor.

Analysts see heady growth at Qihoo 360, but the key to its success is that it's growing even faster. The rising Internet star has beaten Wall Street's profit targets by double-digit percentage margins in three of the past four quarters. That includes beats of 27% and 58% in the past two quarters respectively.

Qihoo 360's on fire. Revenue climbed 124% in its latest quarter, as its online advertising and game-platform businesses posted triple-digit top-line growth. Profitability is growing even faster, with adjusted earnings rising from $0.20 per ADS a year earlier to $0.47 per ADS this time around. The strength should continue, with Qihoo 360 now forecasting revenue to more than double during the current quarter. 

Analysts were mixed after last month's quarterly report. Morgan Stanley boosted its price target to $95.30, but Stifel downgraded the stock on concerns that marketing costs will spike the next few quarters as Qihoo 360 monetizes its paid search platform and fleshes out its other online endeavors.

The lack of a Wall Street consensus isn't a bad thing. It's natural for the pros not to agree after the stock has nearly tripled this year. Expectations have elevated along with the share price. 

Naturally this kind of growth rate isn't sustainable. Analysts see Qihoo 360 growing revenue and earnings per share by better than 57% in 2014. However, that's still a premium to the forward earnings multiple of 36 that Qihoo 360 is presently fetching. That's not cheap, but it's still a bargain relative to its growth rate as it heads into 2014 with healthy momentum from cashing in on its popularity on several online fronts.

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