Cheap Stocks Wall Street Loves: Qihoo 360 Technology

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Qihoo 360's game platform. Source: Qihoo 360.

The Internet has always gotten investors excited: Even after the U.S. tech bust in the early 2000s, investors didn't hesitate when Chinese Internet companies started popping up. After years of dominance by industry giant Baidu , up-and-comer Qihoo 360 Technology made a huge splash in the space in 2013. Last year, Qihoo shares almost tripled as the company built up considerable market share to present a potential challenge to Baidu. Yet this year it's been a different story, with the stock having lost almost half its value since March as investors worry about the company's future.

Nevertheless, Wall Street still likes Qihoo 360's prospects, with analyst opinions being almost universally positive and price targets representing aggressive calls for big gains in the near future. Let's take a closer look at Qihoo 360 to see what has Wall Street's brightest so excited.

Stats on Qihoo 360

2014 YTD Return


Average Price Target


Implied Potential Return



9 Strong Buy, 10 Buy, 5 Hold

Source: Yahoo! Finance.

Why Wall Street loves Qihoo 360
Wall Street gravitates toward growth stocks, and companies seeking to tap China's Internet have huge prospects for future growth as more of the nation's population becomes technologically savvy. In analysts' eyes, the faster the growth, the better the stock, and that helped make Qihoo 360 a favorite over even Baidu in terms of positive predictions for share price movement, as it came from a much smaller position to play a larger role in the Chinese Internet space.

Qihoo 360's Internet Security product. Image source: Wikimedia Commons.

Despite its share-price challenges, Qihoo hasn't stopped delivering on growth. In its most recent quarter, revenue more than doubled from year-ago levels, as Qihoo saw a nearly 90% gain in its mobile user base. More than 640 million users have Qihoo security software on their mobile devices, and although the company hasn't yet fully figured out how to monetize those users effectively, it nevertheless sees them as a huge opportunity for future profit. Moreover, on the important search traffic metric, Qihoo has likely hit its goal of 30% market share earlier than it expected, and efforts to increase cash flow from search are part of a larger initiative aimed at overall profit generation.

Of more immediate importance has been Qihoo's move into gaming. Revenue from the company's value-added services division, which includes its games, made up more than 45% of total sales during the quarter and is on pace to beat out advertising as Qihoo's top moneymaker.

What's holding Qihoo 360 back?
The bad news for shareholders, though, has been that despite solid revenue growth, fears about Qihoo 360's future profitability have weighed heavily on the stock. Competition from Baidu has led to price reductions in many key areas, and following suit has caused Qihoo's margins to contract which naturally harms profits. Qihoo's response has been to hire industry expert John Liu as its chief business officer, with the specific task of addressing better monetization of the company's search traffic. If Liu can deliver more revenue per user, then Baidu's huge advantage in that area could disappear quickly.

Qihoo's search engine. Source:

Still, there's reason to feel confident about Qihoo 360's long-term prospects despite the share-price decline. Some of the drop in Chinese Internet stocks generally has come from global investors reassessing their exposure to emerging markets, and the rise of U.S. tech stocks earlier this year might have taken some attention away from China's tech counterparts. Plus, even as Qihoo keeps margins somewhat thin now, it is also investing in its future, and that could pay off with accelerated growth once investors become more comfortable with China's macroeconomic situation and recent regional tensions.

Overall, Qihoo 360 has shown typical share-price behavior for a growth stock, going through wild swings in both directions. Yet the bullish thesis for the stock remains intact, and if Qihoo can keep up its momentum in the mobile space, then it has the potential to keep fighting with Baidu for dominance of the important Chinese Internet industry for years to come.

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The article Cheap Stocks Wall Street Loves: Qihoo 360 Technology originally appeared on

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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