Analysts thought that Qihoo 360 (UNKNOWN:QIHU.DL) would come through with a great quarter this morning, but they still aimed too low.
Share of the company behind China's most popular Web browser and security software moved sharply higher after serving up another blowout quarter. Revenue soared 108% to $151.7 million, and adjusted earnings skyrocketed 147% to $51 million. Yes, that's more than a third of its revenue making it all the way to the bottom line. China's kind tax rates and the scalable nature of being a dot-com darling will work that kind of net margin magic.
More importantly, that $51 million translates into $0.40 per ADS. The pros were holding out for a profit of $0.26 a share on just 98% top-line growth.
It wasn't a surprise to see Qihoo beat the pros. The stock has now nearly quadrupled over the past year on the strength of its heady growth. It also only helps that Baidu (NASDAQ:BIDU) and Weibo parent SINA also moved higher when they posted robust quarterly results earlier this summer. Baidu and SINA also lean on online ad revenue to drive growth.
Qihoo relies on its browser and malware-tackling software to bring home the bacon, but it also recently began monetizing the search engine that it launched last month. Qihoo's entry into search initially held Baidu's stock back, but now that it's starting to slap paid search ads on its engine, it should benefit both companies. After all, if Qihoo is getting advertisers to pay more to reach its users, it's going to likely also boost the value of marketing through market leader Baidu.
It's not a coincidence that Baidu bounced back from a pair of uninspiring quarters last month with its own blowout results after Qihoo began cashing in on the surprising success of its search platform.
Baidu also issued upbeat guidance at the time, and Qihoo is taking that baton and strapping on a rocket.
Analysts figured that Qihoo's revenue would decelerate to 94% year-over-year growth for the new quarter. Yes, you don't often see 94% growth and deceleration in the same sentence. However, Qihoo's target of $181 million to $183 million in revenue for the third quarter translates into its top line swelling by at least 115%.
Investors will have to pay up for the octane. Qihoo is now fetching nearly 50 times next year's projected earnings as of today's open. SINA's trading at more than 40 times forward earnings. Baidu seems like a relative bargain at just 22 times next year's profit target, though naturally it's not growing as quickly as Qihoo.
Chinese Internet stocks may have been out of favor a year ago, but the right investments -- the ones thriving in this climate -- have earned the right to storm back into favor.
Qihoo may seem expensive now, but it's really just starting to scratch the surface of what it can do as it milks its growing user base across all product and service categories.