Qihoo: Explosive Growth?

08/14/2014 10:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

The Shanghai stock market is on fire—especially Internet stocks—which is why this is the sector we’ve turned to for our latest recommendation, notes Mark Skousen, editor of Fast Money Alert.

Qihoo 360 Technology (QIHU) started out as a Chinese mobile security product provider but has invested heavily in the Internet search and mobile gaming fields to gain significant market share from giant Baidu (BIDU), its principal competitor.

Qihoo is set for explosive growth. With profit margins exceeding 17%, earnings skyrocketed to $140 million on $826 million in revenues (up 141% in the past year), handily beating expectations. The Beijing-based company has almost $1 billion in cash and continues to expand.

In its most recent quarter, it enjoyed strong performance and robust growth in PC and mobile games, as well as advertising (up 121% in the past year). It is expanding rapidly in mobile security devices (360 Mobile Safe).

It also has launched a brand new mobile browser and mobile search app, which should strengthen its position. In just two years, Qihoo has taken 25% of the search traffic in China. Moreover, Qihoo is seeing solid growth in its gaming segment, which continues to attract developers and users.

Qihoo stock still has room to grow. It is selling for 24 times forward estimated earnings, with a price/earnings to growth (PEG) ratio of 0.91 (anything less than 1 is considered excellent). It announced a private placement of $450 million in convertible senior notes, which pushed the stock down temporarily.

Now is a good time to buy. Citigroup initiated coverage on Qihoo with a buy rating and $114 price target. Let’s buy Qihoo 360 Technology QIHU at market today and set a protective stop of $75 a share here.

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