Qihoo announced today that it will release its third-quarter earnings report on November 24 and this will give investors an opportunity to see if profit margins are showing signs of improvement, after the market was left disappointed with the second-quarter results.
Even though the search engine market in China is already well developed, the industry continues to grow at over 50% year-on-year, which points to strong growth potential for the likes of Qihoo.
Of the estimated RMB16.4 billion of search engine revenues in the third quarter, 59.9% comes from mobile. Qihoo has been investing heavily in its mobile services, and this can be justified by mobile’s contribution to search revenues in the industry.
However, this heavy investment has seen the firm’s margins suffer as a result, and sparked a $40 dollar sell off in Qihoo’s share price from August to October.
The importance of mobile can be seen in the industry forecast below, which estimates that mobile will continue to grow at double the pace of PC revenue for the next few years. This huge growth potential needs to be captured by China’s tech firms, and as we saw in Baidu’s third-quarter earnings, the firm is monetising this industry-wide growth in mobile, and it is the core driver of revenue growth.
I will be expecting to see evidence that Qihoo is pursuing the same strategy, and will want to see an improvement in market share.
From a personal point of view, despite solely using Google for western-related searches while in the UK, I rarely use Google in China, simply because the connection to the site is very unreliable. This is having a detrimental effect on its market share, as the domestic services have begun to squeeze it out of the market.
Of the domestic services, Qihoo remains third behind Baidu and Sohu’s Sogou, which has seen a big investment from Tencent, and has since leveraged its search on Tencent’s platforms.
Qihoo’s market share of 2.9% grew from 2.6% in the previous quarter, but this market share is based on revenues, and when based on traffic, Qihoo is second in PC, and third in mobile.
While this suggests that the firm isn’t monetising its search service enough, management has actively discussed that they are investing in monetising search, including the acquisition of MediaV, which will optimise search advertisement monetisation.
Management and risk description
The release of the third-quarter results on November 24, and the subsequent conference call on November 25 before the open of the US equity markets, will be the major event for this trade view.
While I expect that margins will show some signs of improvement, the conference call will be important because the firm’s management will likely need to explain how the recent expenses are being transformed into improvements in revenue and profits.
In addition, I will be interested to see how the acquisition of MediaV has been integrated into the Qihoo system, and whether we can see the fruit of this investment already.
Parameters
Entry: $71.97
Stop: $55
Target: $80 Time horizon: Three months
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