Compared to Baidu (NASDAQ:BIDU), Qihoo 360 (UNKNOWN:QIHU.DL), arguably, has inferior products, so why has Qihoo stock almost tripled its investors' money over the past year while Baidu keeps hitting new 52-week lows?
Here are two simple reasons why.
1. Qihoo is a viable advertising platform to Baidu.
Qihoo had great news in its latest quarterly report. Not only did its revenues accelerate by 59% to $109.9 million but its online advertising revenues also grew healthily by 40%. That's thanks to Google's (NASDAQ:GOOGL) help in Qihoo's war with Baidu.
Since January 18, Qihoo has partnered with Google to help the second-place Chinese search company sell search ads. While that may not be as profitable for Google as it is elsewhere around the world (as Fool contributor Rick Munarriz notes), Google has few options -- it has fallen into single-digit market share from this time last year.
Even without Google, Qihoo seems like it would do fine. Qihoo's current search market share is as high as 12%. So, with few competitors for advertisers to turn to, Qihoo may simply be a viable contender in a price war, undercutting top-dog Baidu. Whatever the case, it's working: Qihoo is estimated to have raked in $6 million in search advertising revenue last quarter.
2. Qihoo has more tech industries to grow into than Baidu -- the 800-lb gorilla.
In China's relatively nascent tech scene, Qihoo can do little wrong. It was only a year ago that Qihoo 360 was most well known for its anti-virus software. That fact, in and of itself, explains Baidu's plight.
With so many arms in different tech businesses -- from online video to mobile operating systems -- Baidu's businesses are varied. Like Google, Baidu dominates many of the areas it competes in. However, because the Chinese Internet penetration rate is only about 40%, the race to become the king of tech is far from decided. So, Baidu's dominance today doesn't equate to an easy future.
Qihoo understands this well. Leveraging its distribution network as an anti-virus maker, the company launched a web browser, which quickly became a hit. When it came time to enter the search market, Qihoo pulled a similar trick. While these moves seem "bad" -- even the Chinese government has told Qihoo to stop -- one thing is for sure: It works. Again, in under a year, Qihoo has become the second most used search engine with about 12% of the search market.
Can Qihoo go higher?
While it may have inferior products, you shouldn't be surprised that Qihoo has trounced Baidu's stock. As an aggressive marketer, Qihoo has ridden its way to second place in the search market, proving that it's a viable advertising alternative to China's top dog. That's why Wall Street continues to push Qihoo's price targets higher. Can it last forever? Maybe, maybe not.
Fool contributor Kevin Chen owns shares of Baidu. You can follow him on Twitter at @TMFKang or on Google+. The Motley Fool recommends and owns shares of Baidu and Google. 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.