Is China’s Qihoo IPO a buy? (Ticker:QIHU)

Qihoo 360 has its fingers in a lot of pots and that adds up to a steady income stream. Here are some key facts and figures you need to consider before investing in Qihoo 360 (NYSE:QIHU).

The Chinese anti-virus software-maker Qihoo 360 Technology Co. Ltd. is expected to begin trading on Wednesday under the ticker QIHU on the NYSE. The Web security company makes an assorted suite of anti-virus software, the most popular of which is “360 Safe Guard,” which had 301 million monthly active users as of January, according to the company’s F-1 Filing.

Why buy Qihoo 360 shares? Anti-virus + browsers + online games = Big Business.

Qihoo 360 has its fingers in a lot of pots and that adds up to a steady income stream. In 2010, the company booked net income of $8.5 million on $57.7 million in sales. Qihoo pulls in that cash from a number of sources. Chief among them? Paid anti-virus software. In addition to “360 Safe Guard,” the company offers “360 Anti-Virus,” “360 Mobile Safe,” “360 Online Shopping Bodyguard” and more.

There’s a lot more to Qihoo 360, though. The company also makes China’s second most popular Web browser: 360 Safe Browser, which claims 172 million monthly active users and a user penetration rate of 44.1 percent. Safe Browser’s biggest competition is Microsoft Corporation’s (NASDAQ:MSFT) Internet Explorer.

Some 98 million of those 172 million monthly active users of Safe Browser access Qihoo 360’s “Personal Start-up Page,” which acts as a content portal and gives Qihoo a platform to promote its other services, including an open gaming and e-commerce platform that’s set up to let developers build and distribute online games and shopping services. Game developers are among Qihoo’s heaviest advertisers, often paying the company to promote new games or inking rev-share agreements with the company.

All this adds up to Qihoo claiming to be China’s third-largest Internet company with more than 300 million monthly active users. That’s a great base to promote products and it lead to year-over-year revenue growth of 79 percent in 2010, according to the Wall Street Journal.

Bigger and better things. Qihoo 360 plans to use funds from its IPO to research and develop new products. The company will also consider strategic acquisitions that could boost its marketshare in China. One of the most appealing aspects of Qihoo 360, though, is its aggressive expansion into the mobile realm. If mobile anti-virus software becomes a standard paid download for Web users in China, Qihoo could accumulate piles of yuan as the mobile market in China is set to explode.

“Users are also increasingly conducting Internet activities through mobile devices, including mobile-banking, mobile-commerce, mobile-gaming and mobile social networking, among others,” Qihoo 360 writes in the company’s F-1 Filing. “According to iResearch, the number of mobile Internet users in China increased from 17 million in 2006 to 303 million in 2010, representing a CAGR of 105.3%, and is expected to grow further to reach 658 million by the end of 2013.”

658 million mobile users. Think about that number. It’s more than twice the population of the United States.

Bumps in the road: Still, for all the positives, there’s a big unknown in Qihoo 360’s future as the company’s embroiled in a legal dispute with Tencent Holdings Ltd. (HKG:0700). Tencent, which develops China’s leading instant messaging software QQ, started bundling its own anti-virus software, QQ Doctor, with downloads of its instant messaging platform. To run QQ Doctor, users have to uninstall Qihoo 360 software. Both companies have since launched smear campaigns targeting one another as they struggle to maintain market share, according to a Wikipedia page (360 v. Tencent) that details the dispute.

No matter what the ultimate outcome of the case, Qihoo 360 is forging ahead with its IPO. The company plans to sell 12.1 million American depositary shares at $10.50-$12.50 a pop. Every two ADSs will represent three Class A ordinary shares. It’ll be interesting to see how investors respond. I, for one, wouldn’t want to take on Tencent head-to-head, but in China’s cut-throat online market, competition is the name of the game. To the victor go the advertising dollars.

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