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Chinese Internet Stocks Stay On a Hot Streak

7 September 2013 in Trading Ideas

Few sectors have defied the broader US market’s downturn of the past month, but another strong earnings report by a Chinese Internet player has offered solace to investors in that industry.

Last week, Qihoo 360 reported quarterly earnings that easily topped Wall Street estimates, sending the company’s stock further along on its torrid run: the stock is already up 184% in 2013.1

Qihoo’s results followed similar street-beating profit reports last month from Chinese web companies Baidu.com and Sina, which have also seen their stocks surge this year – Baidu has gained 32%, while Sina has gained 65%.

china internetCoincidentally, all three of these stocks represent a 33% weighting in the China Internet motif, which has climbed 9.4% in the past month, and is up 60.2% in 2013. The S&P 500 has lost 1.9% over the past month, and has gained 14.8% so far this year.

As in the US, Chinese Web companies are ramping up their focus on gaining share in the mobile market, and Qihoo could be rising to the top. The company already derives 40% of its revenue from services, including online games, and a recent buy rating slapped on the stock by JPMorgan cited the company’s good positioning with its solid large mobile traffic platform.

However, for the most part, Baidu, Sina, and Qihoo aren’t direct competitors — yet. Baidu is China’s top search provider, while a service of Sina’s essentially acts as the Chinese Twitter. Qihoo, meanwhile, offers a browser and web security tools.

Nonetheless, all three companies depend on advertising for most of their revenue, and it’s inevitable that the quest to become the leading Internet presence in China is going to lead to more competition. In fact, it’s already happening – Qihoo made a reported attempt to acquire Sohu.com, a search rival of Baidu’s, but the deal fell through.

For now, the state of investor warm-fuzzies for Chinese internet stocks is such that good news from any of the sector’s major companies seems to help the stocks of everyone else. And, fundamentally, that does make some sense. As The Motley Fool’s Rick Munarriz recently pointed out, it’s no coincidence that Baidu bounced back after two uninspiring quarters once Qihoo began cashing in on the success of its own search platform.2

“After all,” Munarizz wrote,” if Qihoo is getting advertisers to pay more to reach its users, it’s going to likely also boost the value of marketing through market leader Baidu.”

That current everybody’s-a-winner mentality has been increasingly rare amid the market’s latest slump.

1Paul Ausick, “Qihoo 360: China’s Internet Darling du Jour,” 24/7 Wall St., Aug. 26, 2013, http://finance.yahoo.com/news/qihoo-360-china-internet-darling-114025738.html, (accessed Sept. 5, 2013).

2Rick Munarriz, “Qihoo Rocks, and Baidu’s Cool With That,” fool.com, Aug. 26, 2013, http://www.fool.com/investing/general/2013/08/26/qihoo-rocks-and-baidus-cool-with-that.aspx, (accessed Sept. 5, 2013).

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