Qihoo 360 Falls Short of Baidu

By Markets Fool.com

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Source: Baidu.

Wall Street isn't showingQihoo 360 Technology Co Ltda lot of love since the Chinese Internet company posted quarterly results after Monday's market close. The stock moved 5% lower on Tuesday, and analysts have mixed opinions on where the stock will go from here.

Qihoo 360's quarterly report was solid. Revenue soared 95% from a year earlier, to $431.2 million, better than the 88% top-line spurt that the pros were projecting. Adjusted earnings only moved 14% higher, but investors have come to accept the slide in margins out of China's dot-com speedsters. The shift to mobile has been tricky to monetize, and most of the leading Internet companies are investing in growth initiatives in areas that won't pay off right away.

As upsetting as the meager bottom-line advance may seem, Qihoo 360's adjusted profit of $0.75 a share is actually ahead of the flattish $0.71 a share in net income that analysts were targeting.

Qihoo 360 seems to be in a good place, on the surface. It has beaten Wall Street's quarterly profit expectations for more than a year. It's growing at a pace that puts most market darlings to shame. However, pull up a chart, and Qihoo 360 hit yet another 52-week low on Tuesday following its report. Uninspiring guidance, a sequential dip in mobile revenue, and an investing climate that's not kind to uncertainties in Chinese growth stocks are weighing on Qihoo 360. One analyst has had enough.

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The Great Wall of worry
After seeing its revenue costs more than triple during the past year, Qihoo 360 knows that it needs to be doing a better job of either controlling costs or making them pay off sooner. Qihoo 360 has been realigning its product development teams and its organizational structure as it streamlines its monetization efforts.

It's not close to where it wants and needs to be, especially given its market dominance in Internet browsers and anti-virus software and its growing presence in Baidu's stronghold of search. Qihoo 360 initiated its guidance for the current quarter during Monday's call. It sees $375 million to $380 million in revenue. That's less than it just rang up during the fourth quarter, but seasonality justifies the sequential slide. The more problematic nugget in the guidance is that it implies that year-over-year revenue will climb at a mere 41% to 43% pace.

Some analysts took Monday afternoon's report in stride. JG Capital analyst Henry Guoreiterated his bullish rating on the stock, pointing out that heady top-line growth should resume during the latter half of this year. UBS analyst Erica Poon Werkun also stuck to her bullish outlook, actually bumping her company's price target on the stock from $84 to $85, despite growing concerns about mobile growth. Her new goal and Qihoo 360's falling stock price result in a juicy 88% of potential upside based on Tuesday's close.

HSBC wasn't as kind, sticking to its neutral rating on the shares, and slashing its price target to $56 from $68. Rising competition from Baidu -- which quite frankly has done a much better job of adapting to the shift in usage from PC to mobile -- is one of the concerns at HSBC.

HSBC isn't alone. Stifel and Jefferies bumped its price targets lower last month ahead of this week's poorly received quarterly report.

Baidu's report earlier this earnings seasonwasn't a treat. The undisputed champ of search in China also saw its margins continue to contract. However, the slower-growing Baidu saw its revenue go from posting a nearly 48% year-over-year pop during the fourth quarter to guidance calling for a 33% to 38% year-over-year uptick this time around. Qihoo 360 may be growing faster, but the rate of year-over-year growth deceleration from one quarter to the next looks brutal at Qihoo 360 in comparison.

The market apparently wants Qihoo 360 to prove itself here. Wall Street wants to see if Qihoo 360 can rein in its costs without sacrificing growth as it tries to become a bigger force in the mobile future. It's a tall order, but one that it will needs to satisfy if it wants to be mentioned in the same investing pedigree of Chinese dot-com darlings as Baidu.

The article Qihoo 360 Falls Short of Baidu originally appeared on Fool.com.

Rick Munarriz owns shares of Qihoo 360 Technology Co. Ltd.. The Motley Fool recommends Apple and Baidu. The Motley Fool owns shares of Apple and 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.