Qihoo's Growing Dominance in China Is a Sign of Better Things to Come

Qihoo's earnings and revenue have been growing at a breakneck pace, and there are no signs of a slowdown.

Apr 28, 2014 at 9:00PM

Qihoo 360 Technology (NYSE:QIHU) has made rapid progress in the Chinese Internet industry. The company is now providing stiff competition to Baidu (NASDAQ:BIDU), taking away market share and rubbing shoulders with Tencent (NASDAQOTH:TCEHY) in the gaming market as well. Looking forward, will Qihoo be able to sustain its terrific performance, or will it end up defeated by bigger peers? 

Qihoo is growing at a very fast pace; in the fourth quarter, revenue increased 115% year-over-year to $221.6 million, comfortably beating analysts' estimate of $209 million. In addition, Qihoo's earnings also increased an eye-popping 218% year-over-year to $0.70 per share, outpacing consensus estimates of $0.43 per share.

Dominance counts
Qihoo's success is a result of the company's concrete steps to strengthen its mobile security and mobile app store products. With its PC-based active users reaching 475 million, Qihoo enjoys a dominant position in the Chinese Internet industry. Moreover, 70% of China's active PC Internet users use Qihoo's PC browser. In addition, Qihoo is the leader in smartphone security in China with 70% market share.

Going forward, Qihoo expects its leading position in Android-based app distribution in China to drive results. Qihoo leads with more than 40% of the market in its bag. Further, the company's search engine is witnessing meaningful traffic gains, having hit a market share of 23% at the end of 2013. 

This is a big achievement for the company since Baidu was the dominant player in the search industry in China at one point of time. Last May, Baidu commanded 70% of the search market in China. However, that metric has decreased to 58% now, according to Chinese research firm CNZZ. Going forward, Qihoo is intent on narrowing the gap with Baidu further by achieving 35% share of the Chinese search market by the end of 2014. In addition, the company has already launched a few mobile search related products to improve its position on this platform as well.

Gaming growth
On the other hand, Qihoo's game platform is also attracting game developers and users in good numbers. Qihoo runs about 800 games on its game platform and is adding subscribers at a decent pace. At the end of the fourth quarter, Qihoo had about 700,000 paying gaming accounts compared to 560,000 in the prior quarter. Going forward, as the Chinese gaming market is expected to grow at a fast rate, Qihoo should see further improvements in this metric.

However, Qihoo has to overcome the giant Tencent in a bid to make its mark on the Chinese gaming industry. Tencent is the biggest game operator in China. In what would come across as a remarkable fact, Tencent is the world's biggest company in terms of game-related revenue, according to research firm Newzoo.

Tencent's QQ Games portal has been a big success, and now the company is extending its reach through its popular WeChat messaging service. The WeChat client also distributes digital games and has 300 million registered users in China. So, Tencent has a strong hold in the Chinese gaming industry, which Qihoo will need to overcome if it is to make meaningful progress in the future.

Takeaway
Conservative investors might now like Qihoo after looking at its trailing P/E of 114, which appears highly overvalued. However, the forward P/E of 23 is quite reasonable and indicates rapid earnings growth. Qihoo has delivered solid earnings growth in the past and, given its growing dominance in the Chinese Internet industry, the streak could very well continue in the future. So, looking at its growth rate, investors should not mind paying a premium for the company.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Ayush Singh has no position in any stocks mentioned. The Motley Fool owns shares of Baidu. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers