Keep Your Eye on Qihoo

 | Mar 25, 2013 | 1:24 PM EDT
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Qihoo 360 (QIHU) had a big run-up leading into its earnings report a few weeks ago. It almost reached $36 right before the release. That's way ahead of the $14 it traded at last summer, on fears that Citron Research was talking up claims of fraud at the company.

Although Qihoo's earnings beat expectations, its guidance gave pause to investors, who pulled back from the shares.

Last week, on fears about Cyprus, Qihoo's shares got down to $28. This morning, they've bounced back over $30 again.

With Qihoo, I believe that there are many reasons to be positive, although there are some risks as well.

Basically, Qihoo is a play on the growth of advertising in the Chinese internet. Let me explain.

Many people are excited about Qihoo's entry into search. They see evidence that Qihoo can keep taking share from Baidu (BIDU). Qihoo only entered search in August, and it is now up to about a 12% share in the market. That's fantastic growth. It can probably keep taking share.

Qihoo has leveraged the fact that it's on so many PCs in China through its anti-virus software. It also offers a browser through this software. Many people use that browser as their default and therefore have started using Qihoo's search as their default.

In many ways, Qihoo's browser is like the Google Chrome of China. It's been on the upswing. Qihoo has also entered mobile search, but that business is still in its infancy.

At the same time, Baidu has been fat and happy with its search share for a long time. It had a high market share but nowhere to go but down.

These are all reasons to be bullish and reasons why Qihoo's shares have done so well since August.

But the bigger picture is that more and more ad dollars are going to be flowing into China in the coming years. It is inevitable that Qihoo will get a lot of those. Just from that inflow alone, Qihoo might triple in the next three years. That would be a big deal.

From the risk side, there's always concern in China, and Qihoo has attracted short-sellers like Citron before. Its CEO is the former head of Yahoo! China, and he is known to be an aggressive guy. There have been allegations of Qihoo using its antivirus software to spy on the contents of users' PCs.

If you're making a bet on Qihoo, you basically believe that the increased ad dollars more than compensate you for the risk of accounting or governance problems over the next two years.

The growth is just too good to pass up.

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