mcintire investment institute - collab.its.virginia.edu · • e.g. type google.com in browser and...

M c I n t i r e I n v e s t m e n t I n s t i t u t e1

MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA

Presented by Grong Wang| October 2, 2012

Qihoo 360 Technology Co LtdNYSE:QIHU

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

• Company Overview• Stock Information• Misperception• Thesis Points• Risks• Recommendation• Q&A

(VAR will be included throughout the presentation)

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COMPANY OVERVIEW

• Internet service and software provider in China

• Founded in 2005, and IPO in 2011 March• Three parts of services and products

– PC-based products– Mobile-based products– Internet-based service

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BUSINESS FORMATION STEP ONE

• PC Security and Anti-Virus Software– Published 360 Safe Guard in 2006

• Marketing Strategy–Security–Free

• Extremely successful: 425 million users (June 2012)

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BUSINESS FORMATION STEP TWO

• Business Expansion– Published over 20 PC-based, mobile-based,

and internet-based service and softwares• Important Service and Softwares

– 360 Browsers– 360 Personalized Start-up Page– 360 Web Game Center

• Marketing Strategy–Security & Free–Controversial Pushing

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BUSINESS FORMATION STEP THREE

• Revenue Generation– Advertising

• 360 Personalized Start-up Page• Revenue: 50.8milion (2012 Q2)• Slowed Growth: 11.9% last quarter

– Value-Added Service • 360 Web Game Center• Revenue: 21.7 million (2012 Q2)• Slowed Growth, 3% last quarter

• Where is the next growth point?7


STOCK INFORMATION

Price22.87

Range21.80 - 23.00

52 week13.71 - 26.35

Open21.97

Vol / Avg.2.43M/3.51M

Mkt cap2.66B

P/E57.73

Div/yield -

EPS0.40

Shares116.38M

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LAUNCH OF SEARCH ENGINE

• QIHU launched its own search engine, 360 Search, on August 15th– forcibly changed the search engine choice of its

360 Safe Browser– changed the search engine of its personalized

start-up page– attained 10% of search share in five days

• Market responded favorably– stock price jumped 38.9% from $17.70 to

$24.58 in the ensuing week– Currently at $22.87

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MISPERCEPTION

• The census of the Street is that QIHU has significant opportunities in web search industry in China, and will pose serious challenge to Baidu (NASDAQ:BIDU), the current leading player in the field.– Some investors have been optimistic that the

visits share will exceed 20% in 12-24 months

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THESIS POINTS

• Search Engine Reliance: stock price highly relies on web search engine performance

• Uncompetitive Search Engine: inferior user experience

• Business Model Weakness: high reliance on its own browser

• Cost of Aggressiveness: customers’ complaint and besiege of other Chinese technology companies

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SEARCH ENGINE RELIANCE

• QIHU’s current stock price relies heavily on the news of its new search engine, and the market has been very sensitive about the search engine performance

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• Current business model without search engine factor cannot sustain such high stock price– mkt cap: 2.66B– P/E(trailed): 57.73– revenue: 280M (estimated for 2012)– net income: 60-80M (estimated for 2012)– cash and cash equivalents: 359M (2012 Q2)

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Conclusion• It is the perspective of its newly launched

search engine that supports QIHU’s current high stock price

• Search engine performance fluctuation will gravely influence the stock price

• Question: how competitive is 360 Search?

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UNCOMPETITIVE SEARCH ENGINE

• Chinese web search industry resembles that of America, where Baidu, like Google, enjoys a dominant position

• But meanwhile, there exist multiple smaller players as well– Baidu: 64%– 360 Search: 9.2%

• (Notice: lower than 10% at the end of August)– Sogou: 7.6%– Google China: 6%– Soso: 5.1% (Source: Hitwise)

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• Baidu’s Advantage– Good User Experience– Brand Loyalty– Multiple Product with High User Stickiness

• 360 Search’s Advantage– 360 Safe Browser: 26.94% Market Share

(Source: CNZZ)

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• VAR• Blind Polling

– providing search results of several keywords by both Baidu and 360 Search, and ask interviewee to choose which search engine they would favor

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• VAR• Blind Polling

– providing search results of several keywords by both Baidu and 360 Search, and ask interviewee to choose which search engine they would favor

– Result: interviewees overwhelmingly favored the search results produced by Baidu

• 51 Samples collected, and 44 (86.3%) favored Baidu

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VAR

• Ang Guo– VP of Makepolo.com– Formerly an engineer of Sogou, and was in

charge of Sogou’s web search effect and search advertisement algorithms

– Acquainted with Dr. Dong Zhang, the leading engineer of 360 Search

– Independent of all major web search providers

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• Ang Guo– confirmed that there exists large technology

gap between 360 Search and Baidu, and thought “the time needed [for QIHU] to catch up is lengthy.”

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• According to Mr. Guo, there are two ways whereby a search engine can acquire visits– visits made by users actively

• e.g. type google.com in browser and search there• Due to brand influence, over 95% of such visits in

China goes to Baidu, and most of the rest 5% largely goes to Google.com.hk

– visits acquired through various channels• e.g. browser search field, start-up pages’ search

field, internet bar’s default search, etc.• 360 Search acquired almost all of its visits by its

browser and its start-up page

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• Due to the user experience gap between 360 Search and Baidu, and the dominant brand influence of Baidu in China, it is rather difficult for QIHU to attract users to actively visit its search engine

• Therefore, 360 Search performance is largely dependent on the growth of 360 Safe Browser

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BUSINESS MODEL WEAKNESS

• There are two problems caused by 360 Search’s high dependency on QIHU’s browser products

• First, the share of 360 Browsers will set a ceiling on the growth of 360 Search

– It will be fine if 360 Browsers’ share is also growing fast, but if it is not....

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8

15

23

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07/09 07/10 07/11 07/12

Qihu Browsers Share (%)Source: CNZZ



• Furthermore, since browser market has a much lower entry barrier, the share 360 Safe Browser attained is much more susceptible to competition than that of web search engine.

– Potential competitors include Baidu, Tencent, Alibaba, etc.

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• Conclusion: • The specific business model that QIHU

subsists on actually limits further growth of QIHU’s web search engine, and more alarmingly, the web search engine share is more precarious than the Street perceived due to its high dependence on QIHU’s browser product.

• Therefore, the extensive optimism on the street is not concretely supported, and the current stock is overpriced.

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COST OF AGGRESSIVENESS

• QIHU is one of the most aggressive technology company in China– extralegal forcible change: “cloud editing”

without informing users of the change, and refuse to revert the change

• e.g. 360 Search– hijacking users’ computer – Past record:

• QIHU and Tencent• QIHU and Kingsoft• QIHu and Baidu

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COST OF AGGRESSIVENESS

• Two Consequences:• 1) Forcible changes lowered user

satisfaction– e.g. complaint soared after 360 Search

• 2) Making too many giant opponents at the same time– e.g. Tencent, Kingsoft, Baidu, etc.– Inviting more competition in the future

• Both increases potential risk for QIHU

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RISK

• Uncertainty of marketing strategy of QIHU• Forcible “cloud editing”• This is China

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THINGS TO MONITOR

• 360 Search’s Share• 360 Safe Browser’s Share• New competitor in browser market• User satisfaction with QIHU

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RECOMMENDATION

• Shorting at 0.75% of portfolio, and short additional 0.5% if the stock exceeds $25.00 in the coming two months.

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Questions?

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