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Strategic trade
Trade view / 20 January 2015 at 0:45 GMT

Qihoo's search engine rebranding boosts market share prospects

China Watcher / Shanghai
China
Price target:
Market price:
Background

Chinese software firm Qihoo has achieved an impressive position in the search engine market in a relatively short space of time. Even though its PC search service was only launched in September 2012, and its mobile search app in June 2014, it already holds a market share of over 29% in terms of search traffic. 

The reason for the rapid growth that the firm has seen is that Qihoo has differed from the likes of Baidu, whose search results tend to favour the larger and state-owned firms. Qihoo is favoured by small to medium sized enterprises because it gives these websites more opportunities for exposure. Qihoo designed its search engine on the idea that webmasters could submit their websites’ sitemaps into the Qihoo search engine, making the process simpler and fairer for all firms, irrespective of size. As mobile search and O2O becomes the core strategy for search engines, small and local firms will want access to potential customers, and therefore Qihoo would offer a better opportunity to connect these users with local services.

The problem that China’s search engines have had is that it is very difficult to compete with Baidu, whose market share in terms of revenue has increased from 79.7% to 82.2% over the past two years, as Google’s presence in China shrinks. So as larger firms favour Baidu, SMEs are disadvantaged, because they can’t afford to compete on Baidu’s keyword auction service. Because Qihoo offers a fairer service for SMEs, the firm has the potential to take this demographic away from Baidu. I expect that this will be the ongoing search strategy for Qihoo, as their other rival in the industry is the Tencent-backed Sogou, which has integrated its search features into Tencent’s hugely popular WeChat and QQ social networking platforms. 


Qihoo's New Search Engine: Haosou
 










Source: Qihoo

Estimates suggest that Qihoo will release its fourth quarter earnings at the start of March, where the two big focus points for investors will be the monetization of mobile search and the development of its budding enterprise security business. Despite mobile search only being launched in June, the firm likely began to monetise its large mobile user base in the fourth quarter, which will help to close the significant gap between Qihoo’s search engine market share in terms of traffic and revenues, which stood at 29% and 2.9% respectively at the end of the third quarter.

In regards to enterprise security, the firm is expected to take a leading presence in the fast growing industry, as it leverages its products on their market leading status in personal security software. While the end of 2014 saw the first product release, investors will be looking for further clarification on the firm’s strategy, and how the initial sales figures are looking in the first quarter. 

The rebranding of the firm’s search services will be discussed in the conference call, and I expect that management will focus on the potential of the SME market, and how SMEs using Baidu would benefit by switching to Qihoo’s Haosou.

Management and risk description

With the trade view focusing on the upcoming earnings release, there is an inherent risk to the trade. Over the past few years, Qihoo has an impressive record of almost always beating consensus for EPS and revenues, but the share price reaction over a one-day and three-day period has a very checkered track record, because investors have always focused more on the earnings conference call.

Investors should consider the fact that the average absolute one-day and three-day share price reaction from the four earnings releases in 2014 were 3.94% and 4.99% respectively

Parameters

Entry: $56.11

Stop: $50

Target: $65

Duration: Three months

— Edited by Robert Ryan

Disclaimer:
Non-independent investment research
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