Shares of Baidu and Qihoo 360 , the two largest search engines in China, have respectively rallied nearly 70% and 280% over the past four years. Most of that growth was attributed to the rapid growth in Internet users across China.
But last year, that growth slowed down dramatically as the country's online population grew just 4% to 642 million users, reaching nearly half of the total population. That's a steepdecline from 10% growth in 2013.
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But even as that core market matures, Baidu and Qihoo 360 might still be worthy investments. Let's compare both and see which stock is the better buy.
Beijing, China. Source: Pixabay.
Top line comparisonsBaidu currently controls 71% of China's search market, according to Chinese research firm Analysys. Last quarter, Baidu's total number of onlinead customers rose 21% annually as revenue per customer rose 9%. Gross merchandise volume (GMV) -- which includes Qunar's travel services, Nuomi's daily deals, and Baidu's Takeout Delivery service -- climbed 119% to $9.5 billion. Accounts on Baidu Wallet, its online payment service, soared 520% to 45 million.
That solid ecosystem growth helped Baidu's revenue grow 36% annually to 18.38 billion RMB ($2.9 billion). Mobile users also generated 54% of Baidu's revenue, up from 50% in the prior two quarters.
Qihoo 360, which expanded into search market after becoming an established name in antivirus software, controls just 13% of China's search market. Last quarter, Qihoo's revenue rose 38% annually to $438.3 million. Online ad revenue surged 72% to $293.9 million. And though Internet value-added service revenue fell 16.4% to $122.2 million, that was due to the government's suspension of online lottery sales -- and that decline should reverse, since Beijing recently agreed let provinces individually approve onlinelottery sales.
Qihoo's 360 Total Security. Source: Qihoo.
To counter Baidu's search dominance, Qihoo uses its own "protected" browsers to drive users to its search engine and homepage. It also generates revenue by placing ads in its free PC and mobile security products. Active users of all these products rose annually,though average daily clicks on Qihoo 360's personal homepage declined.
Bottom line comparisonsLast quarter, Baidu's net income declined 27% annually to $447 million due to heavier ecosystem investments. That's because Baidu wants to turn its mobile app into a single O2O (online-to-offline) platform for booking movie tickets, buying things, or making reservations. Many of Baidu's rivals, like Tencent's WeChat, have been expanding similar platforms which could decrease user dependence on Baidu's ecosystem.
In June, Baidu announced that it would invest $3.2 billion in Nuomi over the next three years to integrate the latter's e-commerce features into its core app. In September, it introduced Duer, its voice-activated equivalent of Siri, as the voice of its O2O platform. To counter Tencent's introduction of China's first online-only bank, WeBank, Baidu launched an Internet bank with Citic Bank. Big investments like these are weighing down Baidu's margins, but they also widen its defensive moat. To soften that bottom line blow, Baidu bought back $1 billion in shares last quarter.
Meanwhile, Qihoo's net income more than doubled annually to $81.4 million last quarter. Unlike Baidu, Qihoo has only taken baby steps into the O2O market with its 360 Merchant Connect app, which connects its mobile users to restaurants. It also launched three security-focused Android smartphones earlier this year through a joint venture with Coolpad. But beyond that, Qihoo doesn't seem interested in challenging heavyweights like Baidu and Tencent for ecosystem dominance. That's good for its margins now, but it might set a ceiling for its long-term growth.
Outlook comparisonsLooking ahead, Baidu expects its fourth quarter revenues to rise 29.5% to 33.4% annually. That came in below analyst expectations for 34.7% growthdue to macro concerns about the Chinese market. However, Baidu's guidance didn't include Qunar's earnings beyond Oct. 26 due to a recent deal with Ctrip, so analyst estimates didn't fully account for that shift. Baidu didn't provide clear bottom line guidance for the quarter, but it expects sales, general, and adminstrative expenses to rise 80% to 90% in the second half of the year in comparison to the first half.
Qihoo didn't provide any forward guidance last quarter, but analysts expect its revenue to rise 36% during the current quarter. But more importantly, Qihoo still hasn't addressed a private takeover offer which CEO Zhou Hongyi and a group of investors made in June. That unresolved issue casts a long shadow over its long-term plans.
Valuation and verdictQihoo currently trades at 31 times trailing earnings, which is lower than Baidu's trailing P/E of 39 and the industry average of 35 for the Internet information providers industry. Qihoo's trailing P/S ratio of 5 is also lower than Baidu's P/S ratio of 7.
For now, Qihoo looks like the better deal, thanks to its robust top line growth, relaxed online lottery rules, disciplined bottom line growth, and lower valuations. However, investors should watch out for news about the go-private offer and see if Qihoo should spend more heavily to hold its ground against Baidu and other rivals.
The article Better Buy Now: Baidu Inc or Qihoo 360 Inc? originally appeared on Fool.com.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Ctrip.com International. 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.
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