Why QIHU Stock, One of the Hottest Chinese Internet Plays, Could Crumble

by Jim Woods | November 22, 2013 12:35 pm

On Monday, we get to see if one Chinese stalwart Internet stock, Qihoo 360 Technology (QIHU[1]) can deliver the earnings goods to keep its investors happy.

Qihoo185 Why QIHU Stock, One of the Hottest Chinese Internet Plays, Could CrumbleThere’s been a lot of news out of China these days, and most of it is very good for investors — but not necessarily for investors in QIHU stock. This month, we got word that the world’s second-largest economy is undergoing a makeover, as the Chinese government announced plans to loosen restrictions on the its’s one-child policy[2]. Then there were the financial reforms, including plans to create a system for insuring bank deposits.

But for investors concerned with the bottom line in Chinese companies like QIHU, these reforms are minor compared to corporate earnings.

And once again, we will kick of Thanksgiving week with the latest numbers from Qihoo.

QIHU Could Be in Trouble

Qihoo 360 is one of the big Chinese Internet[3] search engine firms, with about 15% to 20% of the country’s search market. That’s small when compared to its much larger rival, Baidu (BIDU[4]), which has about 70%. But QIHU is still out in front of up and coming rival Tencent Holdings (TCEHY[5]) with only about 10%.

That Tencent equation could be a game changer for QIHU stock. Why? Because Tencent now is part of the part of the much bigger player in the Chinese Internet ecosphere, gaming and mobile services giant Sohu.com (SOHU[6]).

Considering the threat from above with Baidu, as well as the threat from below from Tencent and Sohu, it is more important than ever for Qihoo earnings to come in strong this quarter.

So, what would QIHU stock investors consider a strong earnings report?

For starters, I think QIHU will have to at least beat Wall Street forecasts[7] for EPS of 37 cents on revenue of $181.74 million. Those estimates for Qihoo have been steadily rising over the past several months, so any shortfall on the actual numbers will be justly interpreted by Wall Street as a major disappointment.

Indeed, any shortfall on estimates could also take QIHU stock down substantially.

Consider that over the past month, shares of QIHU stock are already down nearly 4%. That decline can be at least partially attributed to profit-taking, as QIHU stock is up nearly 190% year-to-date.

However, Qihoo stock also suffered a big hit after it failed to ink its deal to purchase the Sogou search platform from Sohu. That deal was made with the aforementioned Tencent, and the missed opportunity by Qihoo caused QIHU stock to get punished.

In addition to a top- and bottom-line beat, Qihoo executives also will have to let us know how the company plans to battle its two rivals now that it missed out on the Sogou deal. We will all have to see a pathway to future growth if QIHU stock is going to build on its strong 2013 showing.

If we don’t get a sense of this pathway — or if Qihoo fails to even mention the situation — I think you’ll see shareholders searching for the sell button in QIHU stock.

At the time of this writing, Jim Woods did not hold a position in any of the stocks mentioned here. 

Endnotes:
  1. QIHU: http://studio-5.financialcontent.com/investplace/quote?Symbol=QIHU
  2. loosen restrictions on the its’s one-child policy: http://investorplace.com/2013/11/one-child-policy-china-etf/
  3. Chinese Internet: http://investorplace.com/2013/11/sina-stock/
  4. BIDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIDU
  5. TCEHY: http://studio-5.financialcontent.com/investplace/quote?Symbol=TCEHY
  6. SOHU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SOHU
  7. Wall Street forecasts: http://finance.yahoo.com/q/ae?s=qihu

Source URL: http://investorplace.com/2013/11/qihu-stock/
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