Qihoo 360 Can Hurt Baidu This Way

Shares of Qihoo 360 opened nearly 10% higher today -- hitting a fresh all-time high -- after posting better than expected quarterly results.

The Chinese dot-com speedster showed healthy top-line growth with revenue soaring 59% to $109.9 million. Online advertising grew at a healthy 40% clip, but it was mobile games revenue skyrocketing 119% -- now accounting for 42% of the total revenue -- that really drove the push higher.

The path down the income statement was challenging as expected. Qihoo 360 is investing in the infrastructure, marketing, and personnel to build out its browser, security software, and search businesses, leading net margins to crater. Qihoo 360's adjusted profit of $0.14 a share was short of the $0.21 a share it posted a year earlier but in line with Wall Street expectations.

This isn't a bottom-line growth story -- for now -- and that's a good thing. Qihoo 360 sees revenue growth accelerating dramatically in the current quarter. Its goal of $142 million to $144 million is 95% to 98% ahead of last year's showing. It's also well ahead of the $121.5 million that analysts were forecasting.

Naturally this is the kind of report that leaves Wall Street with little choice but to push targets higher, and that's exactly what analysts at Maxim and Stifel did in boosting their targets to $48 and $49, respectively.

Baidu opened flat on the news but moved higher after that. Qihoo 360's rise in search is problematic for Baidu, but the roughly $6 million that Maxim's analyst estimates that Qihoo 360 earned in the otherwise lucrative search business is surprising. Baidu generated $961 million in revenue during those same three months -- how can Qihoo 360 be generating so little with a sizable 15% chunk of the market?

The obvious conclusion is that advertisers on Qihoo 360 are paying a lot less for leads than the larger pool of keyword bidders on Baidu. Qihoo 360 is relying on Google to help it sell its paid search ads, but it doesn't appear to be as successful as Big G is through most of the world, where it's the undisputed top dog. Will cutthroat rates on leads through Qihoo 360 lead to Baidu sponsors paying less? We'll have to watch that in the coming quarters, but the more likely scenario is that Qihoo 360 bids will head higher as its platform becomes more established.

Qihoo 360 is here -- and it's here to stay.

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The article Qihoo 360 Can Hurt Baidu This Way originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Baidu and Google. 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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