Qihoo 360 Technology Co Ltd (QIHU) In Midst Of Two $1B Product Cycles

Qihoo 360

Qihoo 360 Technology Co Ltd (NYSE:QIHU), for the first quarter, posted robust numbers that beat analyst expectations with an impressive revenue growth of 141% year over year. Along with the revenue, adjusted EBITDA and cash EPADS, the company also witnessed significant growth. Though the majority of the revenue jump came from the acquisition of small exclusive PC games, organic revenue growth also came in strongly.

In a report dated May 28, 2014, Stifel analysts George I. Askew, Zim Yin and Steve Rubis said they believe “mobile and PC games powered the outperformance.”

Qihoo has two segments to bank upon

For the quarter, search revenue for Qihoo 360 Technology Co Ltd (NYSE:QIHU) came in at $40 million, which was marginally below the $42 million estimate from Stifel. However, analysts believe “search momentum is accelerating.” For the second quarter, the company expects revenue to grow by 100% year over year.

According to the Stifel analysts, Qihoo 360 Technology Co Ltd (NYSE:QIHU) is in the middle of not only one but two “fast growing, billion-dollar product cycles: search and mobile games.” In 2016, these two segments could boost the company’s revenues to around $3.2 billion, compared to $826 million last twelve months.

Analysts believe that an investment in the company’s technology should be based on the product cycles: “the process of converting innovation into revenue.” Investment on this line helps tech firms to perform better in terms of growth and high incremental margins. According to analysts, Internet firms are making the most efficient use of their investments.

Massive user base to help monetize product cycles

Presently for its PC products, Qihoo 360 Technology Co Ltd (NYSE:QIHU) has 479 million monthly active users. For its smartphone offerings, it has 538 million users, and its app store has 400 million registered users. With such a scale, the company could “quickly monetize product cycles,” believe the analysts.

To boost its share in algorithmic search in China further, Qihoo 360 Technology Co Ltd (NYSE:QIHU) is making use of its “leading browser” and search habits of users. Presently, the company holds a 25% share in search queries but only 3% search revenue share on a run-rate basis. Revenue for the last twelve months was $121 million. Analysts believe that by 2016, the company will be able to grasp 35% of the market share, and revenue from the segment will “conservatively hit 15%.”

Combined revenues from the mobile and PC games business accounted for $106 million for the first quarter, equal to 85% of IVAS revenue and 40% of the total revenue. Of the $2 billion mobile games market, which is expected to rise to $10 billion by 2016, Qihoo holds an 8% run-rate market share. The company has the potential to earn around $1 billion in revenues from the mobile game segment by 2016.

Stifel analysts maintained their Buy rating on Qihoo 360 Technology Co Ltd (NYSE:QIHU) with a price target of $168.

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com

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