In China, Qihoo’s Gains Are Baidu’s Pain

Smaller search engine is stealing market share, sending QIHU aloft

   
In China, Qihoo’s Gains Are Baidu’s Pain

Search engine company Baidu (NASDAQ:BIDU) is commonly referred to as the “Chinese Google” — a term meant to reflect the company’s dominance over the Chinese search market.

But while Google (NASDAQ:GOOG) still is undoubtedly the king of search, some cracks have begun to appear in its stranglehold over the market, as InvestorPlace contributor Brad Moon explained this morning. So, is it time for a new nickname for Baidu?

Unfortunately for BIDU, it’s not — even in the vastly different Internet environment of China, Baidu’s grip over search appears to be loosening, too.

To best understand Goliath’s problem, though, let’s start with David.

Taking on the Giant

Baidu was founded in 2000 and has been the big man on campus for some time. Recently, though, smaller Internet company Qihoo 360 Technologies (NYSE:QIHU) has been inching onto its turf.

Qihoo began by providing mobile and PC-based security, web access and an app store for a user base that it says now represent more than 90% of all Chinese active PC Internet users. Then in August, it debuted its own search engine — originally called Qihoo Search but soon changed to So.com — and made it the default option on its landing page and browsers.

Mere months later, So.com already has gained between 8% and 10% of the market share; QIHU stock has improved 55% in that time.

Shares jumped more than 10% Monday alone on Stifel Nicolaus‘ note that Qihoo launched a music vertical search engine and a map vertical search engine, as well as expectations for future search launches. Those additions come on top of the mobile search it debuted in mid-November.

QIHU’s surge followed another solid gain a week earlier following a booming quarterly report. Following a Q2 that saw profits pressed thanks to the launch of its search engine, Qihoo came roaring back in Q3 with nearly 20% year-over-year earnings growth and a 77% revenue boost.

Toss in Qihoo’s persistent revenue growth for every quarter since going public in 2011, as well as expectations for 50% annual earnings growth for the next five years, and it’s easy to see why investors have ginned up QIHU shares more than 80% year-to-date.

The Other Side of the Coin

As QIHU has ascended, BIDU has retreated. Baidu’s stock traded as high as $150 in April, but they’ve shed nearly 30% since Qihoo entered the search engine ring to under $100 per share, marking a 17% year-to-date loss.

The 58.3% market share Baidu still held in mid-September is hardly anything to sneeze at, but it’s not as good as the mid-to-low 60s it boasted before Qihoo came along. When you’ve been the big man on campus for years, expectations are high — and challengers are worrisome.

Even Google’s slice of the Chinese market has been dwindling thanks to the smaller competitor. Its market share dropped from double-digits to around 6% in just So.com’s first month or so.

A Promising Landscape

There is one whopping difference between slipping search engine kings Google and Baidu, though: the state of each Internet market.

The U.S. market — which provides nearly half GOOG’s revenue — was considered “mature” way back in 2005, so increased competition and dwindling ad profitability have forced the company to diversify its offerings: a tablet, a smartphone, Internet and cable service … you get the picture. As a result, investors are now dealing with a very different animal.

In China, though, Internet penetration is lower overall, leaving plenty of room for growth despite the already-huge number of Internet users, now up to 485 million. Even if Internet consumption growth is slowing, there’s still plenty of room for both Qihoo and Baidu to not just “make it,” but keep growing.

Even analysts that that have cut BIDU’s rating in recent months tend to acknowledge the still-in-tact long-term prospects of the stock. Raymond James analyst Aaron Kessler, for example, noted that there are “near-term concerns over market share losses to Qihoo 360” but added that Baidu is “well-positioned for strong, long-term growth driven by Internet growth in China, increased e-commerce adoption, search advertiser adoption in China and growth from non-search areas.”

The Bottom Line

Of course, all those BIDU drivers apply to Qihoo as well — and the newcomer has the added opportunity of stealing users away from Baidu, as it’s been doing so far. Even as things look OK for incumbent Baidu in the long-term, they look even better for QIHU in the short-term as it keeps adding more search engine options, stealing more market share and watching its stock climb as a result.

So whether you’re Google or “Chinese Google,” one thing’s apparent in the search engine business: Now is a tough time to be on top.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/12/in-china-qihoos-gains-are-baidus-pain/.

©2014 InvestorPlace Media, LLC

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