Qihoo 360: Monetization Strategy The Watchword Of 2014

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Qihoo 360 Technology Co Ltd (NYSE:QIHU) is upgraded from Hold to Buy by Stifel analysts George I. Askew, Zim Yin and Steve Rubis as they believe search monetization will fuel strong revenue growth and potential upside surprise in 2014.

We believe 2014 is the year when Qihoo 360 Technology Co Ltd (NYSE:QIHU) begins to narrow the spread between its search query share of 23% and its search revenue share of less than 2%. The strategies to do this include 1) increasing search advertiser count and driving advertiser density; 2) increasing CPC prices and revenue per advertiser; 3) landing the “big spenders” as search advertisers with the help of a new executive; and 4) continuing to grow search query share including with a “Qihoo Union” offering.

Advertising customer growth major driver for Qihoo 360

Search advertising customer growth is a major driver for Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s monetization strategy. Management has stated that at 100,000 advertisers the company’s monetization efficiency improves substantially. We believe the company will be at 100,000 advertisers by 3Q14.

In 3Q13 Qihoo 360 Technology Co Ltd (NYSE:QIHU) generated $28.2 million in search revenue with an assumed 18,500 search advertisers or about $1,500 in the quarter. As Qihoo ramps its advertiser count, we believe revenue per advertiser could be diluted and decline temporarily to about $900. With that estimate and an estimated 100,000 advertisers, Qihoo’s search revenue in 3Q14 could be $90 million, nicely above our $65 million estimate.

We believe the hiring this month of Dr. John Liu as Chief Business Officer is an important addition to Qihoo 360 Technology Co Ltd (NYSE:QIHU), filling a big sales role.

Our previous, more cautious stance on Qihoo 360 Technology Co Ltd (NYSE:QIHU) was a function of 4Q13 and 1Q14 revenue uncertainty as one of the company’s key advertisers changed policies and stopped paying for traffic. We believe the issue abated by year-end 2013.

Qihoo 360 valuation

We maintain our current financial projections of Qihoo 360 Technology Co Ltd (NYSE:QIHU), although as noted above we do believe our search revenue projections are conservative.

Our $108 target price is equal to an enterprise value / adjusted EBITDA multiple of 18.6x our 2015 adjusted EBITDA estimate of $707.6 million. We continue to have great respect for management and the impressive strategy that has led them to a position of strength in the search industry in China. As Qihoo 360 Technology Co Ltd (NYSE:QIHU) ramps up search monetization on increasing search query market share, we believe our target price multiple may prove conservative.

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