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China's Online Ad Market Peaks as Qihoo Threat Looms

By Douglas Young – Feb 26, 2014 at 1:30PM

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China's advertising dependent Internet companies are likely to see a slow but gradual erosion of their ad revenue growth throughout 2014 as the market slows and competition increases.

We're all getting a better picture of the latest online advertising trends with the recent release of earnings from three leading web portals, revealing a looming slowdown for names like Sina (SINA), Sohu (SOHU -1.96%) and Phoenix New Media. Sina and Sohu could offset the slowdown through growth in their newer businesses, which includes Sina's Weibo microblogging service and Sohu's search and video services. But everyone could also face more challenges from newcomers like Qihoo 360 (QIHU.DL), which is under intense pressure to start monetizing its highly-hyped and fast-growing search service.

We'll look more closely at individual company data in a moment, but let's start with China's broader advertising market, which rebounded slightly last year to grow 6.4% after a dismal year in 2012, according to newly released data. Online spending easily outpaced the broader market, growing 46% for the year. The overall market is expected to slow slightly this year, with 6% growth forecast for 2014, according to Kantar Group and CTR, which compile the data.

Newly data in the quarterly earnings reports from Sina, Sohu and now Phoenix mostly seem to validate the broader forecast. Sina said earlier this week that its ad revenues grew 45% in the fourth quarter, and forecast 48% growth in the current quarter. But it's also worth noting that excluding ad revenue from its much faster-growing Weibo microblogging service, Sina's ad revenue grew just 28% in the fourth quarter and the rate is likely to stagnate or drop slightly in the current quarter.

Meantime, Sohu announced last week that its brand advertising revenue grew 50% in the fourth quarter, and forecast the rate would drop to 40% in the current quarter. The newest numbers from Phoenix show ad revenue grew 37% in the fourth quarter. It forecast the rate would pick up slightly to 40% growth in the current quarter, the most upbeat assessment of any major Internet company so far, helping to lift its shares 7% in after-hours trade after the results were announced.

What Baidu's results mean
We'll get the clearest picture of the latest trends when Baidu (BIDU -3.75%), the granddaddy of all the advertising-dependent giants, reports its quarterly results later today in New York. The bigger picture is that the growth rate for online advertising is probably set to peak in early 2014, and is likely to go down from there. But the news could be a bit gloomier for all the existing players due to the entry of new players into the space, most notably Qihoo and top Internet company Tencent.

Qihoo probably poses the biggest threat, since it has rapidly built up its search engine over the last year, and now controls more than 20 percent of the market. Its stock has soared on expectation that it will soon monetize those gains, putting huge pressure on the company. Meantime, Tencent is also moving aggressively to monetize its wildly popular WeChat mobile instant messaging service, and advertising revenue is clearly one of its targets. At the end of the day, 2014 will be a tough year for all the ad-dependent companies, which are all likely to see their advertising revenue growth rates drop steadily throughout the year.

Bottom line
China's advertising dependent Internet companies are likely to see a slow but gradual erosion of their ad revenue growth throughout 2014 as the market slows and competition increases.

Douglas Young has no position in any stocks mentioned. The Motley Fool recommends Baidu, Sina, and The Motley Fool owns shares of Baidu and Sina. 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.

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Stocks Mentioned

Baidu Stock Quote
$93.36 (-3.75%) $-3.64
Sina Stock Quote
Qihoo 360 Technology Co. Ltd. Stock Quote
Qihoo 360 Technology Co. Ltd.
QIHU.DL Stock Quote
$14.00 (-1.96%) $0.28

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