Monthly Archives: June 2014

ExOne Company: Zacks’ Bear of the Day Play

3D printing is a very exciting industry that is poised to drastically alter the manufacturing landscape. The technology allows for the making of three dimensional objects from a digital model or program, and it is catching-on across the country.

Publically traded companies have started to proliferate in the space, though so far they have seen mixed success from a share price performance perspective.  One stock that really embodies the volatility in this space is undoubtedly the ExOne Company (XONESnapshot Report), a security that has taken investors on a roller coaster ride over the past 52 weeks.

XONE in Focus

ExOne is a company that manufactures and sells three dimensional printing machines and printing products in three key regions; Americas, Europe, and Asia. This Pennsylvania-based company hasn’t been publically traded for too long, but it has seen extreme volatility in its share price lately.

While it is up significantly since its debut, the stock has seen heavy selling pressure so far in 2014, including a nearly 40% loss YTD. However, XONE has been turning things around in the past month as the stock is now up over 30% in that shorter time frame.

Yet before investors get their hopes up about this stock and a potential turnaround in its shares, a closer look at recent earnings estimate revisions for XONE is warranted. Analysts have been ratcheting down their expectations for the company’s near term outlook, and this may suggest that a reversal could be at hand in this stock before too long.

XONE Estimates

Analyst expectations for both the current quarter and the current year have been falling over the past two months, and by a pretty wide margin too. The consensus estimate for XONE’s current quarter calls for a 15 cent per share loss, down from a consensus estimate of a five cent per share loss sixty days ago.

Meanwhile for the current year, estimates have also plunged over the past two months. The consensus estimate called for a loss of 18 cents a share two months ago, but today the estimate has fallen to a loss of 41 cents a share, representing a huge shift lower in a very short time frame.

If these plunging estimates weren’t enough, investors should also note that XONE has a horrendous track record when it comes to meeting expectations anyway. In fact, the company has missed estimates in three of the last four quarters including two triple digit percentage misses in a row.

With these estimates and a poor track record of meeting expectations anyway, investors shouldn’t be fooled by XONE’s recent run up. In fact, we currently have a Zacks Rank #5 (Strong Sell) assigned to this security, and thus are looking for a pull back after its recent huge move higher.

A better choice in the space?

If investors are hoping to stay in the 3D Printing industry, a look to 3D Systems (DDDAnalyst Report) could be an interesting play. The company currently has a Zacks Rank #3 (hold), while it is currently profitable unlike XONE.

Either way, look for the 3D Printing space to remain volatile in the near term, especially as the industry goes through growing pains. XONE may find its footing eventually, but given the sliding estimates and its poor track record, it may be a stock to avoid in the near term unless you are willing to take an extremely long term view on this stock.

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Avis Budget Group: Zacks’ Bull of the Day Play

When one thinks of exciting industries, sectors like biotechnology or social media probably come to mind. One segment that probably isn’t at the forefront of these types of lists though is undoubtedly the rental car business.

While loaning out cars may not be very high tech or exciting, the industry can provide investors with big profits. Take for example Avis Budget Group (CARAnalyst Report), a stock in this often-overlooked space that has surged as of late and could be poised for more gains ahead too.

Avis Budget Group in Focus

CAR is based in New Jersey and provides car and truck rentals—as well as car sharing services—to businesses and consumers across the globe. And while CAR may not have the most interesting business model, it has certainly benefited from a broad recovery as shares have added close to 45% in 2014 alone.

In fact, shares of CAR have pretty much doubled in the past one year period, easily crushing the S&P 500 in the same time frame. But given these kinds of performances, some might be wondering if CAR can maintain this momentum, or if it is due for a crash.

While there is no way of knowing for sure, recent activity in terms of analyst earnings estimate revisions is certainly promising and could suggest that strength is ahead for CAR in the near term.

CAR Earnings Estimates

Recent changes to earnings estimates by covering analysts have been almost universally positive in the past two months for CAR. Not a single estimate has gone lower for the current year or the next year time frames, suggesting universal agreement from analysts on this front.

The magnitude of the estimate revisions for these time periods has also been impressive, as the consensus estimate for the current year has risen from $2.69/share 60 days ago to $2.88/share today. Meanwhile, for the next year period, estimates have risen from $3.50/share to $3.65/share, suggesting that the longer term picture looks bright as well.

The great news about these rising estimates is the growth rate that analysts are baking in for this stock. 30% earnings growth is now projected for the current year, while 2014’s projected growth of 26.7% is not too shabby either. And given that the forward PE for CAR is just a dash over 20, it is pretty reasonable to assume that Avis Budget Group has not become overbought and that more gains could be ahead for this solid company.

Bottom Line

For these reasons, we have assigned CAR a Zacks Rank #1 (Strong Buy), and are looking for more outperformance from this company in the weeks ahead. The stock also has a positive Zacks Earnings ESP, and when this is coupled with a strong Zacks Rank, positive earnings beats tend to follow, so the upcoming earnings report could be a strong one.

Plus, the security is a best-in-breed company, as others in the space such as Hertz (HTZSnapshot Report) have weak Zacks Ranks right now, suggesting it is the best way to play the space right now. So if investors are looking for a top car rental company, they shouldn’t look any farther than CAR, as this stock could definitely continue to march higher in the second half of the year as well.

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Coach: Zacks’ Bear of the Day Play

It’s probably pretty obvious that I’m an investor. And as an investor I look to put money into a situation where it can work for me, not against me. I’m a firm believer that you should invest in assets that appreciate and lease anything that depreciates. That’s why I don’t buy new cars but I’ve been drooling over a 1970 Mach I for the last several years. It’s also why I don’t go to the mall and buy silly things that are going to be worthless in the future. Okay, so for the most part I don’t do that. But sometimes at Christmas or a birthday I get bamboozeled. A significant other or family member will ask for something ridiculous for a gift like a $500 purse. A $500 purse after they already own three $500 purses.

Okay, rant over. It’s not only that I can’t see the logic in purchasing another $500 purse, but I can’t see the logic in buying the company that makes them. And it’s not because I have some personal vendetta against the purses, I just listen to what the analysts have done with their earnings estimates. In the case of Coach (COHAnalyst Report), it’s enough to make them my Bear of the Day.

You don’t have to trust me on this call. You can ask one of the 21 analysts that have lowered their estimates over the last 60 days for the current year or one of the 20 that did the same for next year’s numbers. The magnitude of the cut is substantial as well. The year’s number has dropped from $3.17 down to $3.04 but next year’s consensus fell from $3.44 all the way to $2.09. You read that right, analysts believe that earnings will fall nearly 33% next year. Not the direction you want to the earnings trend to be. This is a big reason why Coach is a Zacks Rank #5 (Strong Sell) in an industry that ranks in the bottom 43% of our Zacks Industry Rank.

The chart looks about as healthy as a Charlie Sheen EKG. Or mine for that matter when I’m at the counter with my credit card out. Let’s start by flashing back to July 2013. The luxury brand was trading above $60. For a few months it was a slow chop downwards. Late summer and early fall the stock hovered in the mid $50s, dropped harshly, then ran back up near $58. That last gasp for air was the last chance to jump ship. The market slapped COH down hard to start the year. Coach tried to hold up again near $50 until late April when it all fell apart.

How nasty is it? $34, nearly half of where it was less than a year ago. The 25 day moving average shifted by 5 days (25×5) which I use to help determine trend is light years away at $40.52. The last time COH traded above the 25×5 was late April. Just a week ago COH was above $40 but it’s just been getting worse since then. Put mildly, there are more attractive spaces in this market right now. Luxury retail brands losing favor in the market are not the place to be.

Bottom Line

There are much better investment ideas in this market than Coach right now. The downward revisions for earnings have been beating the stock into submission. Within the same industry investors should check out Zacks Rank #1 (Strong Buy) Vince Holding Corp (VNCESnapshot Report).

Stillwater Mining: Zacks’ Bull of the Day Play

Yes I know, the market is on fire right now. It’s tough to look at this market and think that there are any bargains out there waiting to be scooped up. But really there are hundreds, you just have to know where to look. Our Zacks Rank helps us find companies with great earnings stories that have analysts changing their earnings targets on. So if we apply the Zacks Rank to a segment of the market that we think is growing on its own then find the best companies in that group and add on good charts, we should be in business.

What are some of the major economic themes taking place right now? The environment is becoming an increasing concern worldwide. With a harsh winter behind us, sea levels and average temps are rising. Now I’m not going to start hugging trees over here on you, but I don’t think it’s too crazy to say that the world is becoming more conscious of pollution.

Another theme is the availability of cheap money internationally. World central banks have been flooding the market with currency, allowing depreciation on a grand scale. All this stimulus and accommodation will eventually come back to roost. Eventually there will be inflationary pressure one day I promise.

Well there is a way to invest in both of these themes. The auto industry has been cutting down on pollution from automobiles through the use of catalytic converters on cars and commodity prices should rise in an inflationary environment. How about investing in a company that provides the commodity that is used in making catalytic converters? That’s exactly what you have with Stillwater Mining Company (SWCSnapshot Report).
Stillwater is a Zacks Rank #1 (Strong Buy) in the mining industry that ranks in the top 38% of our Zacks Industry Rank. Stillwater is the leading low-cost platinum group metals (PGMs) producer in North America. The platinum group metals include palladium and platinum. Most of the demand for palladium in the world, 73%, comes from the manufacture of catalytic converters for automobiles.

Stillwater’s reserves are split roughly 80% palladium and 20% platinum. In 2013, SWC produced 524,000 ounces of PGMs from its Montana Mines segment and still has over 22 million proven and probable PGM ore reserves. And you don’t have to worry about SWC running out of cash anytime soon as their liquidity includes $474 million in cash and cash equivalents and an undrawn credit facility of $80 million.

Analysts are keen on the stock as well. Two analysts have raised current year and next year estimates which have help raise consensus from 45 cents to 63 cents for the current year and from 71 cents to 85 cents for next year. This comes on the heels of SWC surprising three quarters in a row, with the most recent beat nearly doubling the 8 cents per share consensus.

The technical picture is a bullish one as well for SWC. It has been in an uptrend since November, trading from just over $10 to $18 before selling off earlier this month. The sell off from $18 down to $16.23 wasn’t enough to derail SWC. Now the stock trades near $17 and has pulled back to its 25 day moving average shifted by 5 days (25×5). The 25×5 is also positively sloped, implying a bullish bias. The stochastics have recently show a bullish cross from an oversold condition as well. All of these factors are bullish for Stillwater.

Bottom Line

SWC is a company well positioned inside of a growth industry that should benefit from a few key worldwide economic trends that are developing. This, backed by the power of the Zacks Rank, make it my Bull of the Day.

Quidel: Zacks’ Bear of the Day Play

Earnings estimates have plunged for Quidel Corporation (QDELSnapshot Report) since the company delivered disappointing Q1 results in April.

It is a Zacks Rank #5 (Strong Sell).

Although shares have sold off so far this year, the stock still doesn’t like a bargain at more than 50x next year’s earnings and 40x cash flow.

Quidel Corporation develops products that aid in the detection and diagnosis of many critical diseases and conditions, including, among others, influenza, respiratory syncytial virus, Strep A, herpes, pregnancy, thyroid disease and fecal occult blood.

First Quarter Results

Quidel reported its first quarter results on April 23. Adjusted earnings per share (which includes stock-based compensation) came in at 4 cents, missing the Zacks Consensus Estimate of 29 cents by a wide margin. It was also down significantly from adjusted EPS of 45 cents reported in the same quarter last year.

Total revenues plunged 25% year-over-year to $46.7 million. This was also well below the consensus of $63.0 million. Infectious disease net product sales, which accounted for 77% of total revenue in the quarter, fell 27%, driven by a decline in QuickVue Influenza product sales. This was partially offset by growth in Sofia Influenza revenue.

Estimates Plunging

Following the big Q1 miss, analysts revised their estimates significantly lower for both 2014 and 2015. This sent the stock to a Zacks Rank #5 (Strong Sell).

You can see the dramatic drop in estimates in the company’s “Price & Consensus” chart:

The 2014 Zacks Consensus Estimate is now -$0.11, down from +$0.36 before the Q1 report. The 2015 consensus has fallen from +$0.67 to +$0.42 over the same period.

Lofty Valuation

Shares of Quidel have fallen considerably in 2014 but still doesn’t look cheap. The stock trades at 148x 12-month forward earnings and 53x the current 2015 consensus estimate.

Its price to cash flow ratio is a bit more reasonable at 41x but still not anywhere near value territory.

The Bottom Line

With falling estimates and premium valuation, investors should consider avoiding this stock for now.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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Multi-Color Corp: Zacks’ Bull of the Day Play

Multi-Color Corporation (LABLSnapshot Report) recently delivered better-than-expected estimates for its fiscal 2014 fourth quarter as both revenue and EPS came in above the Zacks Consensus Estimate.

This prompted analysts to revise their estimates meaningfully higher for both fiscal 2015 and 2016, sending the stock to a Zacks Rank #1 (Strong Buy).

While shares of Multi-Color Corporation have risen since the Q4 report, there seems to be plenty of upside potential left given reasonable valuation metrics and strong growth projections.

Multi-Color Corporation provides various labels for brands that make home and personal care, wine and spirit, food and beverage, healthcare and specialty consumer products.

Fourth Quarter Results

Multi-Color Corporation reported better-than-expected results for the fourth quarter of its fiscal 2014 on June 13. Adjusted earnings per share came in at 68 cents, beating the Zacks Consensus Estimate of 60 cents. It was a 21% increase over the same quarter last year.

Net revenues rose 15% year-over-year to $193.5 million, which was ahead of the consensus of $192.0 million. This revenue increase was driven by acquisitions. Organic revenue saw a 3% increase in volume, which was offset by an unfavorable impact of sales mix and pricing, and foreign currency headwinds.

Adjusted gross profit as a percentage of net revenue declined slightly to 20.3%. Adjusted selling, general and administrative expenses increased slightly, from 7.9% to 8.1% of net revenues. The lower gross margin and higher S,G&A expenses led to a 30 basis point decline in the adjusted operating margin to 12.3%; however, adjusted operating income was still up 12% year-over-year.

Estimates Rising

Following the Q4 earnings beat, analysts revised their estimates meaningfully higher for both fiscal 2015 and 2016. This sent the stock to a Zacks Rank #1 (Strong Buy).

The 2015 Zacks Consensus Estimate is now $2.55, up from $2.35 before the Q4 report. The 2016 consensus is currently $2.85, up from $2.65 over the same period.

These estimates correspond with 19% EPS growth in fiscal 2015 and 12% growth in 2016.

Valuation

The valuation picture looks reasonable for Multi-Color Corporation. Shares trade around 15x 12-month forward earnings, which is a discount to the industry median of 18x.

The stock also sports a free cash flow yield around 8%.

The Bottom Line

With strong earnings momentum, solid growth projections and reasonable valuation, shares of Multi-Color Corporation offer attractive upside potential.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

Zais Financial: Zacks’ Bear of the Day Play

Incorporated in Maryland in 2011, ZAIS Financial Corp. (ZFCSnapshot Report) is a Mortgage REIT that invests in a diversified portfolio of residential mortgage assets, other real estate-related securities and financial assets.

The company invests in non-Agency RMBS as well as Agency RMBS. They are externally managed and advised by ZAIS REIT Management.

ZFC completed its IPO in February 2013, raising $119 million. As of the end of the previous quarter, it had total investment portfolio of $659 million with 63% asset allocation and 67% equity allocation to residential mortgage loans. Current leverage ratio for ZFC is 2.90x.

Disappointing First Quarter Results

ZFC reported core earnings of $1.5 million or $0.17 per share for Q1 2014.  The results were significantly below the Zacks Consensus Estimate of $0.39 per share. In the last four quarters, the company has managed to meet estimates only once and has missed in the three quarters with a negative quarterly surprise of 35.9%.

Interest income for the quarter was $9.5 million compared with $3.4 million for Q1 2013. The increase in interest income was mainly due to the deployment of capital raised in the IPO and issuance of 8% Notes. This was partially offset by a decrease in the  average RMBS portfolio balance.

Interest expense for the quarter was $3.9 million compared with $0.5 million for the same quarter of 2013. The increase in interest expense was due to an increase in borrowings.

Downward Revisions

Due to disappointing results, quarterly and annual estimates have been revised sharply downwards in the past few weeks by analysts.

Zacks Consensus Estimates for the current and next year now stand at $1.42 per share and $1.82 per share, from $1.75 per share and $1.93 per share, 60 days ago.

The chart below shows the negative earnings momentum for ZFC. Declining estimates sent ZFC back to Zacks Rank # 5 (Strong Sell) last month.

The Bottom Line

Since its public debut, the stock has traded below its IPO price of $21.25.  A juicy dividend yield of 9.6% may tempt some investors to buy the stock but they should remember that the stock has been consistently and significantly underperforming the broader market and the chances of a turnaround are rather low.

Further, the interest rates are likely to start inching up sometime soon and will negatively impact the company’s earnings.

Mortgage industry is currently ranked163 out of 265 (Bottom 31%) among Zacks industries.

Better Play in the Industry?

Investors could look at Capstead Mortgage Corp (CMO)—a Zacks #1 (Strong Buy) stock. CMO manages a portfolio of adjustable-rate mortgage (ARM), issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

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Affymetrix: Zacks’ Bull of the Day Play

Headquartered in Santa Clara, California, Affymetrix (AFFXAnalyst Report) is a leading provider of microarray-based products and services to the global research community. The company utilizes its DNA chip technology in areas of gene expression, analysis, and clinical application to help treat infectious diseases, cancer, and other ailments.

Affymetrix has 1,100 employees globally and has a sales and distribution network across U.S., Latin America, Europe and Asia.

The company has two reportable operating segments: Affymetrix Core (71.6% of revenues in Q1 2014) and eBioscience (28.4%).

Solid First Quarter Results

AFFX reported its Q1 results on May 1. Total revenue for the quarter was $83 million, up 6.4% from the same period last year, with strength in Genetic Analysis, eBio business units, and modest improvement in Expression business.

According to the management the business strengthened in both North America and Europe but results were mixed in APAC—with excellent growth in China, while Japan remained challenging.

Adjusted earnings for the quarter were $1.9 million or $0.03 per share, compared to a loss of $0.9 million or $0.01 a share in Q1 2013 and ahead of the Zacks Consensus Estimate by a penny.

Reported net loss was $10.5 million or $0.14 per share compared with a net loss of $15.4 million or $0.22 per share in the first quarter of 2013.

Positive Earnings Estimates Revisions

After better than expected results, analysts have revised their earnings estimates for the company in the past few weeks.

Zacks Consensus Estimates for the current year and the next year now stand at $0.16 per share and $0.20 per share respectively, up from $0.10 per share and $0.13 per share, 60 days ago.

The chart below shows the recent positive earnings momentum for AFFX:

The Bottom Line

Affymetrix recently reported profits for the first time since the first quarter of 2011. The company’s restructuring plan to focus on high growth markets appears to be finally paying off as evident from the bottom- line growth in the reported quarter.

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lululemon athletica: Zacks’ Bear of the Day Paly

Many investors must be wondering when a turnaround will surface for lululemon athletica (LULUAnalyst Report). It’s one thing to look at a competitive market like women’s sportswear and gauge the proper valuation for unique growth companies.

But it’s quite another mystery to figure out what’s going on inside of a company that may be contributing to its own downfall. Luckily, followers of the Zacks Rank have not needed such insight when they could just look at the earnings estimate data which told the story of a business in troubling decline.

LULU shares earned the Zacks #4 Rank (Sell) last August when they were trading over $70. Throughout out the rest of 2013, the stock consistently remained a #4. Then in late January after another quarterly report that sent analysts scrambling to lower their earnings estimates, LULU became a Zacks #5 Rank (Strong Sell).

Here’s what my colleague Tracey Ryniec wrote in her Bear of the Day starring LULU in April, where she described the challenges for new CEO Laurent Potdevin in igniting a turnaround…

In the fourth quarter earnings press release, he described 2014 as an “investment year” but pledged continued global expansion.

The company provided earnings per share guidance in the range of $1.80 to $1.90. That was well below the Zacks Consensus of $2.19.

Not surprisingly, analysts moved to cut their estimates. 18 estimates have been lowered for fiscal 2014 pushing the Zacks Consensus down to $1.87.

That is negative 2% earnings growth as lululemon made $1.91 in fiscal 2013. Analysts are also bearish on 2015 as 12 estimates were also lowered in the last week for that year.

What’s Changed A Quarter Later?

Two weeks ago, LULU reported for its first quarter of fiscal year 2014. Even though they offered an earnings beat, the guidance was not a good fit for Wall Street.

The troubles for the leading yoga-inspired athletic apparel and accessories retailer seem to be multiplying as even the better-than-expected earnings results and a $450 million share repurchase plan failed to impress investors over the company’s lowered fiscal 2014 outlook.

Despite the better-than-expected first quarter performance, the company came up with a disappointing forecast for the second quarter and slashed its fiscal 2014 guidance as it focuses on transitioning from the demerits of last year’s product recall as well as growing international presence.

During the June 12 trading session, the stock crashed nearly 16% to around $37, its lowest levels in over 3 years. And that’s because investors knew what was coming next: downgrades and razing of forward earnings estimates.

Over 20 covering analysts took the Zacks consensus EPS for this year down from $1.87 to $1.74. And next year was taken down from $2.22 to $2.01.

Goldman Sachs to the Rescue?

According to a Wall Street Journal story on Sunday, the founder of lululemon, Dennis “Chip” Wilson, has turned to Goldman Sachs (GSAnalyst Report) as he seeks a shake-up of the yoga retailer’s board of directors and may consider options including a proxy fight or joining a private equity firm in a buyout.

At this point, any shake-up at LULU will probably be a good one. But how will we know if it leads to the much-anticipated turnaround?

We won’t know, until it’s under way. But one of first and best clues will be when the analysts take notice of progress and start revising their earnings estimates back upward. And that will show up first in the Zacks Rank. Stay tuned.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

Qihoo 360: Zacks’ Bull of the Day Play

With the coming IPO of China’s largest e-commerce portal, Alibaba, investors are looking for more ways to play the massive growth of the world’s largest common-language/culture Internet market. Alibaba, who is still owned 24% by Yahoo (YHOOAnalyst Report), has astonished web-focused investors with its consistent profit growth and massive revenue haul.

Alibaba’s fourth quarter saw a huge quarterly profit gain — its fourth straight — of $792 million on sales that surged 51% to $1.78 billion. Word is that Alibaba’s transaction volume is greater than Amazon (AMZNAnalyst Report) and eBay combined.

Until the IPO of the “Amazon of China,” which is projected to be valued at as much as $200 billion, I am buying a young upstart in the Chinese web jungle: Qihoo 360 Technology (QIHUSnapshot Report), the country’s largest Internet security provider, with over 460 million monthly active users, representing a penetration rate of 96% in the biggest web market.

I first wrote about QIHU last September when I saw them taking the #2 spot in search next to the giant Baidu (BIDUSnapshot Report)…

The Story is Out

Qihoo 360 Technology offers a broad spectrum of Internet and mobile security products. Its core Internet and mobile security products include 360 Safe Guard and 360 Anti-virus 360 Mobile Safe, 360 Safe Browser, 360 Personal Start-up Page, 360 Application Store and 360 Safebox.

In a brilliant strategy move, Qihoo 360 began offering its cloud-based Internet security products for free to users. And this has allowed them to monetize their significant audience through online advertising services, including paid links as well as Internet value-added services, such as offering access to third-party Web games and virtual items.

In 2013, the company’s launch of a search engine so.com was the game-changer that leveraged its broad reach in China to capture lucrative search market share and advertising dollars. The “360” brand stands for Internet security to the company’s users, and these users are a ripe audience for advertisers.

But the innovation didn’t stop there. In September, the company launched 360 Yingshi Daquan, the mobile version of 360 Video, Qihoo’s video vertical search engine. 360 Yingshi Daquan is a 360 mobile app that enables users to search for and view videos from Qihoo partners on Android based smartphones.

What else do Chinese PC and mobile users rely on Qihoo 360 for? Gaming! In an early June research report after meeting with QIHU management, Jefferies analysts noted…

Qihoo has “robust web game growth with strong mobile game player acquisition. Management continues to see a 40%+ organic revenue growth and stable ARPU trend on web games with the majority of the incremental paying gaming accounts attributed to mobile games. The small acquisition of several game companies in early 1Q14 was done to improve Qihoo’s game platform monetization despite their low-margin business profile.” Jefferies has a $150 price target on Qihoo shares.

Monetize This

As Facebook (FBAnalyst Report) seems to be hitting its stride with mobile ad revenues, many analysts believe bigger success is around the corners for QIHU as well. Here’s what Macquarie had to say in late January…

We believe Qihoo is seeing solid trends across all its major business lines – directory page ads, mobile app store, search and web gaming. Qihoo remains one of the few platform companies in China that control the bulk of the Internet and mobile Internet traffic, thus future monetization opportunities from the traffic.

Controlling “the bulk” of Internet and mobile traffic sounds like a pretty good position to be in.

According to Bloomberg, “Alibaba is competing with Tencent Holdings and Baidu for China’s 618 million Internet users by making deals in its home market and the U.S. to extend its e-commerce reach to mobile games and messaging.”

“The growth rates sound like they’re pretty positive for the entire sector, for e-commerce. They have a large base, they have the lion’s share of e-commerce in China,” said Stephen Yang, a Hong Kong-based analyst at Sun Hung Kai Financial Ltd. “For Alibaba itself, how many large cap companies this size are going to get 51 percent growth?”

App-etizing Growth

That is impressive. And it should come as no surprise that the smaller, more nimble Qihoo is growing at high double digits as well, with projected 140% EPS growth in 2014 and 70% growth for next year. So the question becomes “Can Qihoo keep it up and compete for market share in these areas against the giants?”

Macquarie analysts believe the Qihoo App Store is currently the biggest story at Qihoo with its app store having 30% market share in terms of time spent, according to iResearch.

They note, “with the proliferation of apps and mobile games in China and ongoing consolidation of the app distribution channel (e.g. app stores), the balance of power is shifting to the app store side from the developers. We don’t believe the recent announcement by Alibaba to take only 20-30% of revenue share compared to the industry norm of 40-50% today will change the industry dynamics as Alibaba does not have critical mass yet in terms of the app store traffic.”

The Search Question

With a forward P/E multiple now below 30X due to strong quarter-after-quarter of growth, QIHU shares have seen quite a bit of volatility in the past few months as investors and analysts weigh how much of the search market they have. The drop from $120 to $90 has made the risk/reward much more attractive, trading 25% above Baidu’s valuation but with double the growth rate.

The company claims over 20% market share of search, but some critics say it’s probably lower and so not likely on a path to achieving expectations of 30% share that the company projects is possible by the end of this year.

But the Macquarie analysts don’t see that as the big issue right now. They figure it’s a wide, yet growing, range of 15-25% search share right now and leave it at that. Why so sanguine about this key metric?

Because they see Qihoo growing revenue share splits on search from the current 2% to as high as 10%, “especially when it is launching a new keyword bidding system in mid 2014.” And this month brought the launch of Qihoo’s new mobile search engine.

All in all, the pace of innovation to serve more web users is keeping Qihoo revenues growing at quite a clip. Jefferies analysts project 2014’s top line to hit $1.3 billion, 2015 to threaten the $2 billion level, and 2016 to reach $2.7 billion. Here’s a look at that top-line growth trajectory which is growing faster than Baidu’s current $5.8 billion haul…

Bottom line: Qihoo has quickly become a major player in the Chinese web ecosystem because they entrenched themselves as the reliable must-have security provider. Now they just have to keep the bad guys down, the traffic humming, and the innovations rolling to keep growing at high double digits.

Disclosure: I own Qihoo 360 (QIHUSnapshot Report) shares for the Zacks Follow the Money portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.