Despite attack from short sellers like Citron in 2011, Qihu crushed the doubters and launched its own search engine in 2012. Leveraging on its dominant position on PC security software and its popular 360 internet safe browser, Qihu’s search engine suddenly capitulated to second position in China, capturing 15% market share, eclipsing Sogou’s 10% market share, Soso’s 4% market share, and encroaching on 70% market share of market leader Bidu. Qihu’s share sky rocketed from $20 to $90 over one year period (+330%) , delivering the best performance among major Chinese internet companies: Bidu (+58%), Tencent(+55%).
Qihu successfully issued a $600 mm convertible bond in September, and was in a leading position to acquire Sogou, aiming to launch a significant assault on Bidu. Now with Sogou’s marrying into the Tencent camp, Qihu’s lofty valuation suddenly looks very shaky.
A fool’s simple comparison of Qihu vs. Bidu:
2013H1 Rev Search Share Search Rev Market Cap
Qihu $200 mm 15% $12 mm $10 b
Bidu $2000 mm 70% $1200 mm $50 b
Qihu/Bidu 10% 20% 1% 20%
The market seems to be evaluating Qihu’s market cap based on its search market share, while not fully discounting the fundamental differences:
1) Qihu’s search quality is inferior and its search traffic is more casual than Bidu’s;
2) Qihu will continue experience serious difficulty in monetizing its search traffic due to inferior quality vs Bidu and intensified competition from Sogou;
3) Qihu’s revenue are still 2/3 from online Ads, 1/3 from Games, almost none from Search ad despite one year passed since launch.
Qihu’s valuation is estimated at $2.3 b, based on the sum of Search ($1.2 b based on recent Sogou valuation); Online Ads($0.7 b based on 2X 2013 Rev), Games($0.4 b based on 2X 2013 Rev).
Investors who are valuing Qihu at $10 b are buying a lofty bubble. Bidu will likely burst Qihu’s search revenue bubble in the coming quarter. Citron may have last laugh.