Qihoo 360: A 2-Way Investment Play

Qihoo is known as a security company, but its a growing search business that makes it a golden long-term investment opportunity.

Apr 29, 2014 at 2:30PM

Qihoo 360 (NYSE:QIHU) is known for its anti-virus business, but is quickly growing into a relevant name as a search operator. Currently, this market is dominated by Baidu (NASDAQ:BIDU), a diversified company often compared to Google (NASDAQ:GOOG) (NASDAQ:GOOGL), but given Qihoo 360's recent stock losses and its two-headed monster, it might now present a golden investment opportunity.

Qihoo growing in search
Qihoo is a small, but very diversified company. It's known primarily to Wall Street as a Chinese security app vendor, and to a lesser degree for its gaming segment. Furthermore, the company has an enormous user-base; in the fourth quarter, it reported smartphone users of its primary security product reached 467 million, up from 207 million in the year prior.

Qihoo is the undisputed leader of Internet security in China, with its monthly active users representing 70% and 95% of the PC and smartphone market, respectively. Thus, it's no surprise revenue soared 115% to $221 million in its last quarter and that the company carries operating margins of 24% as a well-established leader in a growing market.

However, Qihoo has recently set its aim at a larger market -- online search. This is a space dominated by Baidu, and was responsible for nearly all of its $1.52 billion in first quarter revenue, and 59.1% growth. While Baidu's revenue per advertiser continues to rise, Qihoo has become a real threat in this space.

Last year, Baidu controlled 70% of the search market, but today that share has fallen to 60%. Moreover, in the fourth quarter, Qihoo's share had doubled year-over-year to 23%, and in March, its share reportedly increased to 25%. Therefore, Baidu's fallen share price can likely be attributed to Qihoo's success.

Baidu is not a bad investment
Baidu may be losing share, but China's search market is growing fast, and Baidu is the most developed advertiser in this model. Therefore, its revenue continues to soar. In fact, despite Baidu losing share, analysts still expect revenue growth of 50% and 36.5% for the next two years, respectively. Investors believe much of this growth will come from travel, e-commerce, gaming, and other new segments.

In comparison, U.S. search giant Google is expected to grow revenue by just 10.5% and 17.7% in the same two-year period. Currently, Google trades at 27 times earnings versus a 30 times multiple for Baidu, implying a very small premium for significantly faster growth. Essentially, this signals a discount on shares of Baidu, which suggests that Baidu is not a bad investment amid falling search market share.

Qihoo looks like a good investment
It's important for investors to realize that Qihoo is still in the infancy stage of monetizing its growing search presence. In fact, the company's 115% revenue growth was nearly all created from its security business, as the company has yet to report any exact numbers from search, citing its fundamental impact as being too small right now.

Yet, with a 25% market share, Qihoo's share is 40% of Baidu's, a company that created more than $1.5 billion in quarterly revenue. For long-term investors, this signals that Qihoo's search business could, one day soon, become a major revenue generator, and could produce high margins like Baidu.

Final thoughts
Right now, Qihoo is a security play for investors, but behind the scenes, this company is blowing up the Chinese search market. Granted, neither investors nor analysts know when the company may start to monetize this large presence in search, but conventional wisdom suggests that, when it occurs, the company's revenue will soar to a new level.

Therefore, at 21.5 times forward earnings -- Qihoo has lost one-third of its valuation from 52-week highs -- this stock is rather cheap, especially considering the company's growth. Albeit, as Chinese momentum stocks continue to fall, many for the right reasons, Qihoo remains a company that's simply guilty by association, one where fundamentals support the valuation and losses should be viewed as opportunity.

Not secure, your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google (A shares), and Google (C shares). The Motley Fool owns shares of Baidu, Google (A shares), and Google (C shares). 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information