Qihoo 360 Technology Co Ltd Tumbles Despite Solid Q1 Results

Qihoo 360 shares fell 6.36% to $55.02 in intraday trading Wednesday even though the Chinese company reported strong first-quarter results late Tuesday. The Internet security firm’s revenue rose 45% YoY to $384.4 million, beating the consensus estimate of $377 million. Its net income came in at $53 million or 41 cents per share, up 8% YoY. Wall Street was expecting 33 cents per share in earnings.

Qihoo 360 Technology Co Ltd Tumbles Despite Solid Q1 Results

Qihoo also offered strong guidance for the current quarter. The Beijing-based company is eyeing Q2 revenue between $435 million and $450 million, representing a growth of 37-40% from the same quarter a year ago. Its operating margins in March quarter shot up from 14.9% in Q1, 2014 to 19.7%. Qihoo said its online ad revenue grew 75.1% to $245.3 million.

Qihoo’s value-added services unit disappoints

At the end of March quarter, the company had 503 million monthly active users for its PC-based products and services. The number of smartphone users for its mobile security products rose 45% YoY to 778 million. The remainder of its revenue came from Internet value-added services, which include online lottery and gaming.

Revenue from Internet value-added services fell 20% YoY in March quarter, largely because of slowing sales of online games. China’s suspension of online lotteries also affected this segment. Nomura analyst Chao Wang believes that the suspension of online lotteries could shave off up to 10% of Qihoo’s 2015 earnings. Nomura has a Buy rating on the stock with $69 price target.

Nomura thinks Qihoo is undervalued

Qihoo stock has declined more than 32% in the last 12 months. Nomura believes that the stock is undervalued relative to its profitability and growth rate. The research firm expects Qihoo’s revenue to grow at 42% annually over the next three to five years. Macquarie analyst Wendy Huang is equally optimistic. Huang has a Buy rating on the stock with $97 price objective.

Macquarie says that Qihoo’s search monetization is lagging behind traffic growth. Effective monetization could further boost its revenue. The company re-branded its mobile search to Haosou earlier this year. It has also teamed up with Coolpad to jointly produce smartphones. These opportunities hold further potential for revenue upside.