Qihoo Under New Assault 奇虎再遭做空机构阻击

By newsdoug on July 4, 2012

Qihoo under new attack How many short sellers does it take to kill a strange tiger, or the company more commonly known as Internet software security specialist Qihoo 360 (NYSE: QIHU)? The question itself may sound strange, but Qihoo, whose Chinese name means “strange tiger,” is once again in the spotlight after its data has been questioned once again by yet another short seller. This marks the third time such a report has come out since late last year, reflecting the wide degree of skepticism that many feel towards this company and its controversial leader.

And yet each time Qihoo’s data get called into doubt, investors seem to largely ignore the latest warning of potential problems at the company. Let’s look at the latest attack, which came late last week when a short seller called Anonymous Analytics issued a report saying Qihoo’s user data may be vastly overstated, sparking a 4 percent drop in the company’s shares and later prompting Qihoo to issue a statement denying the allegations. (company statement)

In an interesting twist, an unrelated law firm issued a statement a day later saying it was conducting its own investigation into the matter, in what looks a prelude to a shareholder lawsuit. (law firm statement) This latest attack and the independent investigation are all financially motivated by companies looking to profit by generating doubt about Qihoo, and follow a similar series of attacks by another short seller named Citron starting late last year.

Some of Qihoo’s data was also called into question earlier this year in a more independent report by Forbes magazine, which conducted its own lengthy investigation before publishing a story that looked very well-researched and thorough, in my view.

While the short sellers and law firm are clearly looking to make a quick profit, the fact that Qihoo was always controversial and that Forbes also joined the list of companies doubting the company’s data make me strongly suspect there is at least some basis for all the doubts. And yet despite those questions, investors have shown surprisingly little concern.

After the 4 percent fall last week, Qihoo’s shares largely bounced back in Tuesday trade in New York. And while the shares are down by more than 20 percent since the attacks began last year, they have been surprisingly resilient each time a new negative report comes out.

In fact, this latest attack is just one of a recent wave that also saw Hong Kong-listed real estate developer Evergrande (HKEx: 3333) come under similar assault last month, as short sellers try to profit from lingering doubts surrounding overseas-listed Chinese companies after a series of accounting scandals that began last year. (previous post)

I can’t really comment too much on any of the cases since I’ve only read the company statements and short seller reports. But in the case of Qihoo, the unusual volume and persistence of the attacks, combined with general controversy surrounding the company even before the attacks began, lead me to believe that the company’s saga is still unfolding, and could conclude in dramatic fashion before the end of this year.

Bottom line: The latest short seller attack against Qihoo is the latest wrinkle in an unfolding saga that could end dramatically over the next 6 months.

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