Qihoo Stock A Buy Ahead Of Q2 2015 Earnings

  • Qihoo 360 is due to report  Q2 2015 results on Sept. 1. 2015.
  • Qihoo has been enjoying considerable success with its new mobile search engine.
  • The private buyout offer for the company remains in the cards despite the turmoil in the Chinese market.
  • The short and long-term outlook for Qihoo 36o remains good.
Qihoo stock a buy

Leading Chinese Internet security company, Qihoo 360 (NYSE:QIHU) is due to report second quarter fiscal 2015 earnings on Sept. 1, 2015. Analysts have forecast the company to report EPS of $0.50 vs. $0.30 posted by the company in the prior year period. Qihoo has managed to beat earnings estimates for three straight quarters, with the company beating estimates by a large margin of 29.4% during the last quarter.

Qihoo 360 Quarterly Earnings Surprise History

Fiscal
Quarter End
Date
Reported
Earnings
Per Share
Consensus
EPS* Forecast
%
Surprise
Mar2015 05/19/2015 0.44 0.34 29.41
Dec2014 03/09/2015 0.57 0.54 5.56
Sep2014 11/24/2014 0.49 0.48 2.08
Jun2014 08/24/2014 0.3 0.33 -9.09

 Source: NASDAQ

Qihoo shares have been badly hammered this year--down 15.87% YTD. The latest selloff has come over the past five days after the company unveiled three new smartphone models, coupled with the ongoing turmoil in the Chinese markets that continues taking a heavy toll on Chinese stocks.

Qihoo 360 5-Day Share Return

Qihoo-5

Source: CNN Money

Despite the huge selloff, a cross-section of analysts remains optimistic about Qihoo 360’s prospects. Six out of eight analysts rate Qihoo stock a Strong Buy while two rate it a Hold. The analysts have a mean price target of $94.95 on the shares, representing a huge 97% potential upside to current price.

Qihoo-6

Source: NASDAQ

This seems to concur with my own analysis of Qihoo stock. In the article, I explained that the main reason why I remained optimistic about Qihoo stock was because of the the company’s ongoing success in transitioning to mobile search, a fast-growing field that it entered early this year but has already managed to grab a small but significant market share. Qihoo launched its Haosou mobile search engine in January. Mobile search in the Chinese market is growing at a blistering clip--198% during the last quarter, and accounts for 42.5% of all search revenues.
Qihoo owning its own mobile search engine gives it a good opportunity not only to monetize the platform, but also lower its traffic acquisition costs, or TAC. Traffic acquisition costs for large search companies such as Google (NASDAQ:GOOGL) can be a huge line item--Google spends about 21% of its revenue on TAC. This refers to the money that the company pays to a company like Apple (NASDAQ:AAPL) for Google to become the default search engine on the Safari browser. About two-thirds of Google’s TAC is directly attributable to the Safari mobile browser.

Even though Qihoo does not break out its traffic acquisition costs in its earnings reports the way Google does, it’s likely to be substantial given that its search engine ranks as the second largest in the Chinese market. Part of the reason why Google was able to cut its costs and improve profitability during the last quarter was due to lower TAC. Google has been able to lower its TAC from almost 25% of revenue during 2013 to 21% during the last quarter mainly due to the growing popularity of its Chrome browser.

The same corollary can be drawn for the growing popularity of Qihoo 360 and its mobile and PC search engines.

Qihoo-4

Source: SearchEngineLand

Qihoo’s mobile venture will receive a significant boost from its smartphone JV with Coolpad, China’s fifth largest smartphone manufacturer with about 9.4% market share. A few days ago the two companies released three smartphone models targeted at the high-end, mid-range, and lower-end segments of the market. The new smartphones feature superior security features including dedicated VPN for payments as well as a kill switch for stolen or lost smartphones. This could give the smartphones an edge in the enterprise mobility market where security is often a top priority. Although Android dominates the overall U.S. and global mobile markets in terms of market share, iOS rules the enterprise space due to its superior security features.

Although the market has received the news badly due to the lower margins sported by smartphones compared to Qihoo 360’s core web security business, the move could prove to be highly strategic in the future. Owning a complete mobile ecosystem is usually advantageous for a search company as it’s able to directly control the features that go into its products.

Qihoo Ad revenue to resume growth

Qihoo 360’s slowing ad revenue was one of the key reasons why the company’s top line growth suffered during the last quarter. This was caused by the company’s strategy of slowing down its customer acquisition spree to focus on consolidating its gains and improving user engagement. This way the company ensures that it builds a sticky user base and grows its revenue contribution per customer.

Estimates are that Qihoo 360 resumed its customer acquisition activities during the last quarter. This should help the company to not only grow its advertiser customer base from the 100,000 mark by the end of the quarter, but also its revenue.

A buyout still ion the cards

Qihoo had received a buyout offer of $77/share by co-founder, chairman, and CEO Hongyi Zhou, who wants to take the company private. Current share price is at a big 37% discount to the offer price. Though the ongoing turmoil in Chinese markets might place a damper on Qihoo's bid to re-list on its home turf, this remains a possibility that cannot be overruled.

Bottom line

The short and long-term outlook for Qihoo 360 remains good. The shares, however, might not tack on meaningful gains due to the current Chinese quagmire. But the long-term gains will likely be much more substantial.

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