A Chinese Stock Legend in the Making: Qihoo 360 Technology Co Ltd (QIHU)

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The days of scanning for computer viruses is a task young ‘uns would associate with their parents, but the industry responsible for keeping the bad guys out is very much a current phenom.  Mobile security, in particular, has taken on increased importance in the smartphone age.  The current global market, estimated at $1.6 billion is expected to grow to $10.7 billion by 2017.  And of course, China will be at the forefront of any rapid growth in the global market.

Which leads us to Qihoo 360 Technology Co Ltd (NYSE:QIHU).  In the Chinese market, more than one third of Chinese people use mobile internet, and QIHOO 360 is at the forefront of providing security in this market.  However, Qihoo 360 Technology’s stock price has had a relatively subdued past couple of years.  After a blistering IPO in 2011, when the stock jumped 134% on its debut, it entered a lengthy hangover phase.  The hangover saw the stock give up all of its IPO gain, and then some, before staging a recovery in the latter part of 2012.  This recovery has taken it to a point, where it now lies primed to challenge the highs generated back during its IPO.

Qihoo 360 TechnologyWhy the Resurgence?

What has given Qihoo 360 Technology a new lease on life is solid earnings.  The company has 442 million active users of its PC-based services, a gain of 62 million on the prior year, and effectively accounts for 95% of the Chinese market.  Its mobile security product has 149 million users at the end of Q3. If you consider Qihoo 360 Technology’s relative penetration of the PC market and the approximate 36% penetration in the mobile security market, it’s clear where the growth opportunities lie.

Revenue was up 77% year-on-year, and 15% sequentially.  Gaming was an important component of the growth, with revenue doubling over the year at $25.5 million. Again, for a mobile environment, micro-transactions within games is likely to see this sector grow.

The Doubts?

Given the company’s dominance, it has got into squabbles over unfair competition.  Although this has escalated to possible government intervention, in relation to its Desktop practices.  Potential Beijing intervention brings another level of uncertainty to the table. The company has also run afoul of Apple Inc. (NASDAQ:AAPL)‘s Terms of Service and was booted off the App store.

While it has a lock on the PC market, it’s not unreasonable to expect revenue to stabilize, and eventually fall.  As mobile becomes the defacto norm, it will eventually eat into the revenue generated on the PC side.  How the two offset each other will be interesting.

The Peers

Google Inc (NASDAQ:GOOG) has entered into an agreement with Qihoo 360 Technology to serve its ads on QIHOO Search.  This is an obvious strategy by Google to go after rival search competitor Baidu.com, Inc. (ADR) (NASDAQ:BIDU).  But the strategy looks to have backfired for Google with its search market share falling from 16.2% to 5%, and Qihoo 360′s rising to 10.4%.

However, the real problem is not Google, but Baidu.  While growing market share is impressive, the 84% of market share owned by Baidu is not easily cracked.  Not to mention, there is nothing to suggest Baidu can’t squeeze into Qihoo 360′s existing search share.  Then again, it could all go sour if Beijing impose sanctions (and the nature of those sanctions) on Qihoo 360.

The leverage this brings for Baidu’s expansion into the mobile space is considerable.  Baidu has reported struggles to monetize its mobile traffic, but it still managed to double its mobile revenue year-on-year.  Chinese mobile ad spend is expected to grow from $100 million in 2011 to $780 million in 2016, and the likelihood is Baidu, and not Qihoo 360, will gain the most benefit from this.

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