Morgan Stanley maintains Qihoo 360 overweight rating target 129.60 USD

Beijing time August 26 morning, Morgan Stanley published a study today to maintain the "overweight" (overweight) rating of Qihoo 360 (Nyse:qihu), but lowered its target share price from $135 to $129.60.

The following is a summary of the report:

Second-quarter results exceeded expectations: Qihoo 360 in the second quarter revenue of 318 million U.S. dollars (20% year-on-year growth of 110%), beyond the company's 300 million to 305 million U.S. dollar guidance forecast of the upper limit, more than 309 million US dollar analyst average expectations higher than 3%, mainly from the strong search and mobile business commercialization. NON-GAAP (Non-US GAAP) diluted earnings per share of ads (US depository shares) at $0.52, 10% higher than analysts ' average forecasts.

Both engines are still exerting force: search and mobile businesses continue to drive revenue growth in the second quarter, with each business contributing more than 20% per cent of the revenue for Qihoo 360. Qihoo 360 attracted about 80,000 search advertisers (about 65,000 in the previous quarter). We expect this figure to expand to 100,000 by the end of 2014. Management is expected to deploy a more aggressive search commercialization plan, but will not have much impact on the user experience.

Third-quarter revenue expected to be smooth: Qihoo 360 is expected to be 360 million to 365 million dollars in the third quarter of fiscal year 2014 (an average analyst expected to be 360 million U.S. dollars), the chain growth of 13% to 15%, the year-on-year increase of 92% to 94%. We believe that the company's expectations are more stable, mainly because the entire web-game industry has slowed growth.

Costs are still under control: sales and marketing costs surged 174% from two quarters ago. Management believes that this is mainly due to increased competition in the industry. The company also plans to invest more of its budget in brand building and lower costs for direct access to expensive traffic. As a result, management believes that costs will be under control and profitability will gradually rise.

Maintain overweight rating and cut target price: After Qihoo 360 announced its results, we lowered the GAAP net profit forecast for fiscal year 2014 and fiscal year 2015 respectively by 12% and 2003–4 (NON-GAAP net profit forecasts were cut by 5% and 7% respectively) because our previous assumptions about profitability recovery were too radical. We also lowered the target price of Qihoo 360 from $135 to $129.6. As we remain optimistic about the company's long-term revenue and profitability outlook, we maintain its "overweight" rating. (Ding Macro)