Qihoo 360 Technology Co Ltd (QIHU), Baidu.com, Inc. (BIDU): The Second Big Player in the Chinese Search Market?

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Qihoo 360 Technology Co Ltd (NYSE:QIHU) demonstrated strength in its latest quarterly earnings report, beating estimates and raising guidance. The company is quickly finding ways to make money from search, and is rapidly expanding its market share, putting pressure on rival Baidu.com, Inc. (NASDAQ:BIDU) and taking aim at an even bigger chunk of the search market. The company is also showing strength in the mobile security market with its key product 360 Mobile Safe. Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s profit margins have suffered as a consequence of investments in the newly developed search engine and for the new headquarters, but the management now expects those margins to grow steadily over the long term.

Qihoo 360 Technology

Heavy investments will drive long-term growth

Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s management noted that the company made heavy investments in product development and technology innovation in order to expand its coverage in both PC and mobile markets, as well as cloud-based services. The company intends to continue to make investments and extend its sales and marketing infrastructure to support further search monetization and mobile penetration. The company also bought land to build a new headquarters, which hurt the first quarter’s operating cash flow and capital expenditure.

Qihoo 360 Technology Co Ltd (NYSE:QIHU) has further strengthened its leadership position across key product categories. Monthly active users of the company’s PC browsers reached a record 332 million, almost 70% of the Chinese PC internet population. The company has also expanded its market share in mobile security, with the number of Chinese smartphone users of 360 Mobile Safe reaching 275 million at the end of March. This provides a solid foundation for Qihoo 360 Technology Co Ltd (NYSE:QIHU) to be a leading mobile internet platform in China.

Search market share rising

During the first quarter, Qihoo 360 Technology Co Ltd (NYSE:QIHU) gained notable search traffic share and began to monetize its search engine through both an internal system, and external partnership.

Qihoo has formed an alliance with Google Inc (NASDAQ:GOOG), which left the Chinese search market because of the cyber attacks it endured from Chinese hackers, and the further limits of free speech on the web in China. Qihoo’s reliance on this partnership will be its main search focus in the near-term, until it develops its own internal system.

Qihoo’s management believes that it can capture a significant portion of the search market, which in turn will drive substantial long-term growth for its shareholders. The brand awareness campaign has not fully started yet, since the management admits its search engine is still not at the level of its competitors’. But Qihoo believes it can achieve accelerated growth when its search engine gets better, and when it boosts its awareness campaign.

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