5 Reasons Qihoo Is the Hottest Internet Stock of 2013

by Alyssa Oursler | August 26, 2013 10:43 am

5 Reasons Qihoo Is the Hottest Internet Stock of 2013

Don’t look now, but Qihoo 360 Technologies (QIHU[1]) just opened Monday with a double-digit pop thanks to its just-released second-quarter earnings.

That brings its year-to-date climb to almost 150% — a rocketing reality that blows away competitors across the board. Take a look:

Company Ticker Year-to-date gains 52-week gains
Qihoo QIHU 146% 216%
Yahoo YAHOO 41% 88%
Yandex YNDX 56% 60%
Sina SINA 61% 44%
Google GOOG 23% 28%
Baidu BIDU 39% 20%

With that in mind, let’s take a closer look at why the Chinese company — which offers PC and mobile security, a web browser, a search engine, gaming and more — has become the hottest Internet stock of the year.

#1: Record Everything

Let’s start with this morning’s jump. During the second quarter[2], Qihoo reported record revenue, operating cash flow and net income.

Net income attributable to Qihoo more than quadrupled year-over-year, totaling $33 million, while non-GAAP income jumped from $20.6 million to $51 million. That translated to earnings of 40 cents per share — up from 17 cents the year before and more than 50% better than analysts were expecting.

#2: Back-on-Track Growth

That record revenue also brought the company back to its days of jaw-dropping growth. Qihoo came public back in 2011, and has been posting a steady stream of improvement ever since. Sales more than doubled every quarter of 2011 and for the full-year of 2012.

In the first quarter of 2013, though, revenue “only” increased by 59% — great by most standards, but it could have been viewed as a sign of a slowdown for momentum-heavy QIHU. Investors weren’t fazed, as the company raised its Q2 revenue outlook, but it was crucial that Qihoo actually deliver those eye-popping gains to keep its run going.

It did that and then some. Revenues beat the consensus for growth by 10 percentage points, and the company expects better for the third quarter. Q3 sales are pegged to come in between $181 million and $183 million, representing a year-over-year increase of 115% to 118% and way ahead of analyst estimates for $163 million.

#3: Room for More

New revenues have come in part thanks to new revenue streams. Qihoo has been inching[3] onto Baidu’s (BIDU[4]) turf with its recently launched and even more recently monetized search engine, while it’s also been working to improve its mobile presence with apps and mobile games.

That has been paying off. As CEO Hongyi Zhou noted: ” While search and mobile monetization are still in their nascent stages, they have ramped up faster than expected, and will become key drivers for our future growth.”

Plus, there was talk last month that Qihoo might acquire search company Sohu.com (SOHU[5]) — a deal that would give Qihoo nearly 25% of China’s search market. While it reportedly fell through[6], the possibility of an acquisition remains. Qihoo’s management noted that it will “continue to make proactive investments in product and technology development.”

#4: Market Leader

While it’s good when a company is looking to expand, it’s better if it has some solid ground to start from. Considering Qihoo’s impressive product penetration, “solid ground” is probably an understatement.

The company’s PC security products cover nearly 95% of Chinese PC Internet users, whiles its mobile security solutions cover approximately 70% of Chinese smartphone users. And the issue of cyber security should stay in the forefront considering China faced its biggest cyber attack in history[7] yesterday.

Meanwhile, Qihoo also boasts 330 million monthly active users of its PC browsers — nearly 70% of the Chinese PC Internet population.

#5: Chinese Megatrend

QIHU is likely to hold onto that base for two big reasons: Western competitors are hesitant to venture into heavily regulated country, yet China’s Internet use is both big and booming. As Jim Woods recently noted[8] in reference to Sina (SINA[9]): “There are 70% more people on the Internet in China than are living in the U.S.” … and yet “China’s Internet penetration rate is estimated to be about 40%, which means there is huge room for continued growth.” 

Even if Qihoo simply holds onto the percentage slice of the Internet market pie it already has, that leaves plenty of room for growth.

Although, as Qihoo’s numbers show, it’s doing far more than just holding on.

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

Endnotes:
  1. QIHU: http://studio-5.financialcontent.com/investplace/quote?Symbol=QIHU
  2. During the second quarter: http://ir.360.cn/phoenix.zhtml?c=243376&p=irol-newsArticle&ID=1849612&highlight=
  3. Qihoo has been inching: http://investorplace.com/2012/12/in-china-qihoos-gains-are-baidus-pain/
  4. BIDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIDU
  5. SOHU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SOHU
  6. While it reportedly fell through: http://www.bloomberg.com/news/2013-08-13/sohu-declines-most-in-two-weeks-on-report-qihoo-deal-terminated.html
  7. biggest cyber attack in history: http://finance.yahoo.com/news/chinese-internet-hit-biggest-cyberattack-110100125.html
  8. recently noted: http://investorplace.com/2013/05/dont-miss-the-chinese-internet-mega-trend/
  9. SINA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SINA

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