Qihoo 360 Technology Co Ltd is No Baidu

By Markets Fool.com

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Source: Baidu.

Qihoo 360 Technology Co Ltd shareholders can't be happy these days. Shares of the fast-growing Chinese Internet company plunged 15% last week, hitting a new 52-week low on Friday.

The latest hit to the former dot-com darling is Stifel's Steve Askew slashing his price target on Qihoo 360, going from $98 to $88. The analyst's softer outlook is being attributed to seasonality in the enterprise security business and the current struggles of the PC-based web games industry as developers and gamers shift to mobile.

Web games make up just 20% of Qihoo 360's revenue. It doesn't get the same kind of market attention as its flagship browser, security software, and search engine businesses. However, with Chinese Internet companies including Qihoo 360 and search leader Baidu expanding their offerings, the market finds itself scrambling to assess values based on the ever-shifting sums of their parts.

Stifel's refreshed assessment is actually kind of relative to how Jefferies responded last week. It also moved its price target, but all the way down to $67. Jefferies also downgraded the stock, something that Stifel did not do by reiterating its bullish buy rating.

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Earn baby, earn
We will have a clearer snapshot on Qihoo 360 when it reports financial results for the fourth quarter early next month. Wall Street's holding out for another quarter of monster top-line growth. They see revenue for the final three months of the 2014 calendar year soaring 88% to $416 million. However, just as we saw with Baidu earlier this earnings season, margins are getting crushed in the pursuit of mobile.

It isn't as easy to monetize mobile usage as it is with cashing in on PC traffic. Advertisers expect to pay less for leads generated on the smaller screens. Baidu's earnings climbed at a third of the pace of revenue in the fourth quarter, and the situation is gloomier at Qihoo 360. Analysts see earnings per share climbing at an 8.6% clip -- a tenth of its projected top-line surge -- to $0.76 a share.

Qihoo 360 is also way behind Baidu in migrating to mobile. Its deep penetration of the Internet browser market (495 million people or 94% of the market as of the end of September) has made it easy to push the search engine it rolled out three summers ago to folks on desktops and laptops. Qihoo 360 claims that it now has 30% of the PC search market, narrowing the gap with Baidu. However, it's a different story in mobile where third-party reports have it commanding closer to 10% of the mobile search market. Folks don't browse the web or jump into search queries on tablets and smartphones the way that they do on PCs, and that has been a challenge for Qihoo 360. That used to be a problem for Baidu, but shrewd moves spearheaded by acquiring a leading mobile apps marketplace have made it a major player. More than half of Baidu's traffic now originates from mobile devices.

The good new for potential investors is that the stock has taken a harder hit than the price target revisions. Stifel's $88 goal suggests 71% of upside from where the stock began trading this week. Even the more somber $67 price target at Jefferies points to a 30% pop.

Qihoo 360 will still need to prove that it can follow Baidu into relevance in mobile. It will also need to show the world that it can monetize its growing search engine more effectively relative to Baidu's marketing mastery. Given Qihoo 360's heady revenue growth and low forward earnings multiples it's a bargain here, but only if it establishes itself as a dot-com darling again.

The article Qihoo 360 Technology Co Ltd is No Baidu originally appeared on Fool.com.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.