Shares of the Chinese Internet security company Qihoo have declined 19.54% year-to-date, and more than 57% in the last 12 months. On Monday, the stock briefly touched the 52-week low of $45.28. While some on the Wall Street feel that the stock is a “value trap,” Morgan Stanley analyst George Meng remains bullish on the stock.
Market has become too pessimistic about Qihoo
In a research note issued Monday, Meng said that Qihoo had an “attractive valuation” and recommended investors to accumulate on the stock price weakness. Though the research firm slashed its 12-month price target on the stock from $111.50 to $85, it maintained an Overweight rating. Morgan Stanley said Qihoo was trading at 12x 2015 and 9x 2016 estimated non-GAAP earnings.
Morgan Stanley said Qihoo shares have been declining due to a slowdown in online gaming, regulatory risks on its online lottery business, and app store market share loss. Starting March 1, Chinese government has suspended online lottery sales, directly affecting 38 Internet platforms. According to research firm Analysis, online lottery sales in China grew 43% YoY in Q3, 2014 to 30.4 billion yuan. About 8.3% of Qihoo’s revenue came from online lottery sales in the third quarter.
However, Meng believes that the market has become too pessimistic about Qihoo. Of course, the online gaming market is expected to slow in 2015 as more users shift to mobile. Webgame accounted for 25% of Qihoo’s Q3, 2014 revenue. Morgan Stanley estimates that the contribution of online gaming will decline to less than 15% of its revenue in 2015. Meng said that the growth in mobile should more than offset the slowdown in webgame market.
Qihoo to report Q4 results on March 9
Qihoo is scheduled to release its fiscal fourth-quarter results on March 9 after the market close. Morgan Stanley expects the company’s Q4 revenue to jump 89% YoY to $418 million. Its non-GAAP net income is expected to come in at $104 million, up 8% from the corresponding quarter a year ago. Late last year, Qihoo invested $409 million to form a joint venture with Coolpad to launch smartphones in China.