Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

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

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.

The company is targeting 20% search market share by the end of the year. Qihoo’s current search market share estimates range from 12% to 15%, according to various sources.

Baidu takes a swing at Qihoo’s market

Baidu.com, Inc. (NASDAQ:BIDU) has made a move on Qihoo’s own turf by launching its antivirus software in April. The Baidu.com, Inc. (NASDAQ:BIDU) Antivirus app is co-produced with security experts from Kaspersky. Although the app is still a beta version, it is nonetheless a direct stab at Qihoo, which is known for its security software. In order to compete on a higher level with Qihoo, Baidu.com, Inc. (NASDAQ:BIDU) will need to develop an app for the Android mobile OS as well, since the global trends favor more use of mobile phones and tablets, especially in the Android ecosystem.

Bottom line

Qihoo has managed to expand its leadership position in its dominant markets, and continues to invest heavily to improve its leadership position. The company’s efforts in the search market are evident, and there are more challenges ahead. Baidu.com, Inc. (NASDAQ:BIDU) is quite dominant in the search market, and Qihoo has a long way to go to further improve its internal search system. However, its partnership with Google Inc (NASDAQ:GOOG) could help the company in this goal. On the other hand, Baidu.com, Inc. (NASDAQ:BIDU) might challenge Qihoo in the antivirus market.

China is certainly a huge market, and it has room for two large players. It will be very interesting to see how things go from here. Qihoo’s search market share penetration is what you should look at in order to get a sense of its success. Another thing is if they can make money from search; the next few quarters will show us just what we need to know in that regard.

The article The Second Big Player in the Chinese Search Market? originally appeared on Fool.com.

Dusan Jovanic has no position in any stocks mentioned. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google. Dusan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.