Qihoo Search Hits Plateau
Security software specialist Qihoo 360 (NYSE: QIHU) is learning that bad news comes in waves, with new reports saying the company’s highly hyped new search engine isn’t doing quite as well as previous reports indicated. The news, if true, would follow another major setback for the company last month when an anti-monopoly lawsuit it filed against Internet giant Tencent (HKEx: 700) was thrown out by a judge in a courtroom in southern Guangdong province. (previous post)None of this surprises me too much, since Qihoo is largely a company built on hype engineered by its controversial chief Zhou Hongyi. Still, I do think it’s probably too early to say the meteoric rise is finished for Qihoo’s so.com search engine, which has quickly become China’s second largest player since its launch last summer and the first serious challenger in years to longtime search leader Baidu (Nasdaq: BIDU).
Regardless of how the development of its search business plays out, I do expect to see some weakness in Qihoo’s stock in the months ahead following a sharp rally last year. Qihoo’s stock fell as low as $15 in the middle of 2012 after a series of short-seller attacks questioning the truth of many of its numbers. But the company’s shares have doubled since its launch of its so.com search engine last summer, hitting nearly $35 a share earlier this year before settling to their current level of around $30.
I suspect these latest reports on so.com’s growth will put further pressure on Qihoo’s shares in the months ahead, as the company looks to try and actually make some money from the business. So.com quickly rose after its launch last summer to take nearly 10 percent of the market by last October, according a web traffic monitoring site called CNZZ. (previous post) So.com’s traffic has continued to grow steadily since then, reaching nearly 15 percent earlier this month, based on CNZZ’s measurements.
But another site called Hitwise has shown less impressive numbers for so.com, saying the company’s share was just under 12 percent in March. (Chinese article) The relatively large difference seems related to Hitwise’s bigger focus on major websites compared to CNZZ. But it’s probably safe to say the real number lies somewhere in between the 2 figures, meaning Qihoo’s market share now stands at around 13 percent.
Qihoo use of some new and innovative features have been a major factor behind the rapid rise of its search business, which has won over web surfers looking for alternatives to Baidu. But Qihoo also has a big advantage through its ownership of 2 of China’s most popular Internet software products, one for computer security and the other an Internet browser.
Qihoo has used those products to direct web surfers to its search site, much the way that Microsoft (Nasdaq: MSFT) used its dominant Windows operating system in the 1980s and ’90s to push consumers to use its Internet Explorer web browser. While there’s nothing wrong with this strategy, it can only be effective if consumers like the product being pushed their way.
In this case, it’s not really clear yet if web surfers really prefer so.com, or if they’re just trying out the search engine because it’s easy to access from the Qihoo software already on their computers. At the same time, Qihoo is coming under pressure to start showing some actual revenue from its search business. The company said it was launching a monetization drive for the search business in its latest quarterly report, but didn’t provide any specific targets or figures.
I expect we’ll see the company announce some search revenue figures when it releases its first-quarter earnings report in May, though I wouldn’t expect to see any huge money from the business. In the meantime, I do expect we’ll see Qihoo’s rapid market share gains slow considerably in the year ahead, as it puts more effort into earning money from the business.
Bottom line: The rapid growth of Qihoo’s search business is likely to slow sharply this year, as the company focuses on earning money from the business.
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