Can Qihoo 360 Bounce Back Against Baidu and Sohu?

Can Qihoo 360 Bounce Back Against Baidu and Sohu?

Qihoo 360 Technology will release its quarterly report on Monday, and investors have been disappointed with the slowdown in the stock's growth over the past few months. Once seen as a potential challenger to Baidu and its long dominance of the Chinese search market, Qihoo 360 now faces stronger competition from its larger rival, as well as challenges from Sohu , to try to catch up with Qihoo's fast growth.

Qihoo 360 came to prominence in just the past year or so, when it decided to move beyond its Internet-security niche to create a search engine to compete against Baidu. Despite having faced allegations of questionable practices in building up its customer base, Qihoo quickly rose to the No. 2 position in Chinese online search and now has about 18% of the market, compared to Baidu's 63% and the 10% of Sohu's Sogou. But recent reactions from Baidu have investors wondering whether Qihoo will hit a growth wall in search, putting a lid on future market-share gains. Let's take an early look at what's been happening with Qihoo 360 over the past quarter and what we're likely to see in its report.

Stats on Qihoo 360

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$181.74 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

What's next for Qihoo 360 earnings?
In recent months, analysts have raised their views on Qihoo 360 earnings, increasing third-quarter estimates by almost 25% and full-year 2014 projections by about 30%. The stock has risen 16% since mid-August, but it's fallen back substantially from stronger gains earlier in the quarter.

Qihoo kept its growth momentum going strong in its second quarter, more than doubling its revenue from the year-ago quarter and boosting adjusted earnings by 147%. Qihoo has started to make substantial progress toward reaping revenue from its search engine, and search will likely play an ever-increasing role in Qihoo's overall growth beyond its core browser and antivirus software businesses. Moreover, Qihoo gave guidance that pointed to continued acceleration in sales growth, further heartening shareholders.

But a big disappointment led to a pause in Qihoo's big stock move. After speculation that Qihoo would buy out the Sogou search platform over which Sohu has control, rival Tencent Holding came in and bought a 36.5% stake in Sogou for $448 million. As a result, Qihoo missed out on the opportunity to build up its combined market share in Chinese search above 25% -- and even worse, it will now have to defend its No. 2 position against Sohu and Tencent and their drive to boost Sogou's share. In particular, with Tencent having attractive exposure to younger Internet users, Sogou's ability to market to that key demographic might make its search revenue more profitable for Sohu.

More important, Baidu has started coming on strong again, posing a much larger threat to Qihoo 360. In its most recent quarter, Baidu saw sales climb 42% as it moved more heavily into travel, video, and mobile search. Those moves hurt Baidu's profitability, but in the long run they should give Baidu a key edge over Qihoo if the smaller company can't keep up.

In the Qihoo 360 earnings report, watch to see how the company plans to respond strategically to the Tencent-Sohu partnership. With so much at stake in search, Qihoo needs to find new ways to grow if it wants to retain its position as chief challenger to Baidu's dominance of the Chinese Internet space.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Baidu and 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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