Should You Buy Cheetah Mobile, or Stick With Market-Leading Competitor Qihoo 360?

Cheetah Mobile underperformed during its IPO. Should you buy it, or stick with Qihoo 360?

May 13, 2014 at 1:05PM

Cheetah Mobile (NYSE:CMCM), the latest Chinese company to become public, is a direct competitor of Qihoo 360 (NYSE:QIHU) in the security application and browser space. Surprisingly, the stock barely finished with gains on its IPO, so is it a better investment opportunity than Qihoo, or does the latter's success in search against Baidu (NASDAQ:BIDU) make it the investment of choice in this space?

It's no surprise
Due to Qihoo's two-year 260% stock gains, it's no shock that Cheetah Mobile saw it as a lucrative opportunity to enter U.S. markets. In retrospect, web security has become a hot business, and Cheetah is Qihoo's most significant competition, with the company reporting 222.5 million monthly active mobile users as of February.

In comparison, Qihoo had 467 million mobile users at the end of its last quarter, good for a 126% increase over last year. With that said, mobile is a fast-growing industry in China, as are security applications, meaning there could be a large market in front of these two companies. But, does this mean that Cheetah will enjoy Qihoo's success?

Is Cheetah the next Qihoo
In determining if Cheetah is a good investment opportunity, you must look to the fundamentals. Examining 2013, Cheetah had annual revenue of $123.9 million with year-over-year growth of 160.5%, along with net income of $10.2 million. It's worth noting that Cheetah's year-over-year growth has decelerated a bit, 130% in the first quarter of 2014, but is still impressive nonetheless.

In contrast, Qihoo grew revenue 104% last year to $671.1 million and saw its bottom line improve 113.2% to $99.7 million. So, let's look at both stock's multiples compared to fundamentals over the last 12 months.

 

Qihoo

Cheetah

P/E Ratio

99

196

Price/Sales Ratio

14.2

16.1

As you can see, both companies are valued similarly. Sure, Cheetah's P/E ratio is much higher, but as the company grows, it should be able to sport margins similar to Qihoo. Therefore, with greater growth and increasing market share, Cheetah looks like a good opportunity at 16.1 times sales, especially given its 100%-plus growth rate.

Qihoo's not a bad stock, either
Given some of the multiples for Chinese stocks, and also U.S. Internet companies, 16.1 times sales with this kind of growth and profits is not bad for Cheetah. With that said, Cheetah is limited to the security business alone, and much of its future rests on the ability to either expand into new territories or steal market share from Qihoo, which is easier said than done.

In regard to Qihoo, it has the same risks as Cheetah. However, Qihoo also has an explosive Internet search business that could make it the next Baidu. Specifically, Baidu has been the Chinese search king for many years, but in recent quarters has seen its market share quickly decline due to an increased presence from Qihoo.

At one time, Baidu owned 75% of the search market, but currently, that share sits at just 60%. Meanwhile, Qihoo's share has increased from 12% to 25% over the last year. Yet, while Baidu earned nearly $5.7 billion in annual revenue with its market share, including operating margins of 32%, Qihoo has yet to report fundamental data from its share, citing the impact of search being insignificant at this time.

For investors, this means that Qihoo has an enormous existing business that has yet to be monetized, one that's nearly half the size of the fast-growing $5.7-billion-per-year Baidu. Essentially, this fact provides a hedge against the security business, implying that even if Qihoo loses its grasp on the space, or if Cheetah gains some market share, the company has an even larger market with search to drive share prices higher.

Where's the best investment?
Clearly, Baidu has the most to lose, and based on current fundamentals, Cheetah looks attractive. However, given Qihoo's market share of both search and security, combined with it being in the early stages of monetization, investors should like the company's chances of seeing long-term accelerated growth.

Therefore, Qihoo becomes not only the best long-term investment of these three companies, but with it trading nearly 40% off its 52-week highs, it's also one of the best Chinese investments in the market.

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.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Baidu. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers