Qihoo 360 Follows Baidu's Lead

By Markets Fool.com

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Source: Baidu.

There's still some serious growth to be had atQihoo 360 Technology Co Ltd. The Chinese Internet company posted better than expected quarterly results after Tuesday's market close.

Revenue climbed 45% to $384.4 million since the prior year's first quarter. This may have been a sequential dip and serious top-line growth deceleration, but analysts were only holding out for a 43% year-over-year advance.

The bigger surprise came on the bottom line. Analysts were holding out for a decline to $0.49 a share in adjusted earnings after posting a profit of $0.54 a share a year earlier. Qihoo 360's profit actually clocked in at $0.57 a share.

That's a welcome surprise, even if it means that margins ultimately contracted. Of the three publicly traded companies behind China's three leading search engines, Qihoo 360 is the only one that posted growing year-over-year earnings during the first three months of 2015. Baidu saw its adjusted earnings dip slightly, while Sogou parentSohu.com rang in with another quarterly deficit.

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It's not that margins are getting compressed in paid search. The one thing holding back margin expansion is that all three companies are expanding into areas that don't carry the same kind of markups as search. Baidu and Sohu are investing in online video, a tricky niche to monetize given the hefty licensing and bandwidth costs. Qihoo and Sohu are players in the fickle gaming market.

To be fair, Baidu is the only one of the three where high-margin search is its primary business. Search accounted for just 23% of Sohu's revenue in its latest quarter. Online gaming and its Internet portal that feasts on brand advertising are the two bigger drivers there. Qihoo 360 is actually just starting to monetize its search platform. It's mostly known for its mobile security software suite and its leading Internet browser.

Diversifying into new areas is part of the road map for China's dot-com speedsters, though one has to wonder if Qihoo 360's next venture -- it expects to make a play for mobile handsets in a few months with the launch of QiKoo smartphones -- may be too big of a gamble in an area where margins are even tighter.

Then again, Qihoo 360 can always point to Baidu's success as it sets its sights on several different markets. Shareholders wouldn't mind following Baidu's lead here. Shares of Qihoo 360 have shed more than half of their value since peaking 14 months ago, unlike Baidu which hit a new all-time high late last year. Qihoo 360 just needs to generate respect. It has been consistently beating Wall Street's quarterly profit targets for more than a year, and improving earnings coupled with its cascading share price find it fetching less than 12 times next year's projected earnings. Qihoo 360 is an intriguing value proposition, but before that plays out it needs to earn the market's trust.

The article Qihoo 360 Follows Baidu's Lead originally appeared on Fool.com.

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