Are We Seeing the Emergence of a New Search King?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite fears of a slowing Chinese economy, it is still a rapidly developing market that has four times the population of the U.S. Thus, there is great opportunity for all business, especially in the ever-evolving web, including search, a space where clear leaders are emerging; and opportunities are being presented.

A market not owned by the search king

Google (NASDAQ: GOOG) is, without question, the U.S. search market leader. In fact, Google controls about two-thirds of this $22 billion U.S. market, a market that continues to grow by double digits year-over-year in number of core searches.

While many know that Google controls the search market, and that the majority of the company’s revenue is earned through search and advertising, Google is also the leader in global search. Yet, the one large market that Google has not captured, and likely won’t, is China.

In the month of June, Google had just 2.1% of the Chinese search market, which was down from 4.7% in October, according to the research firm CNZZ. Instead, Baidu (NASDAQ: BIDU) is the Google of China, having 69.4% of the market.

The Chinese search leader…For now!

If you were to visit Baidu.com and then translate it to Google.com, you’d find that it is nearly identical to the U.S. version of Google.com. Baidu has flourished by controlling the Chinese space, trading at eight times sales and producing growth of 40% year-over-year.

In terms of investment outlook, there are many who believe that the Chinese search market could produce some of the greatest gains in the market, as it is still being developed. Like I said, China has four times the population of the U.S., yet its largest market player, Baidu, produced just $3.8 billion over the last 12 months, or 7% as much revenue as Google.

As you can see, there is a lot of room for a company such as Baidu to grow, but strangely, it is not the most promising player in the Chinese search market. Instead, Qihoo 360 Technology (NYSE: QIHU) is the company that you should be watching.

An emerging favorite

In the last year, Baidu has lost 23% of its value, despite 40% growth, and Qihoo has seen its valuation rise 186%. While Qihoo also offers virus protection and desktop applications, the company is emerging as a search leader in the Chinese market, which is why its stock is shooting higher.

Currently, Qihoo is trading at 15 times sales and is producing revenue growth of 60% year-over-year. The company is yet to monetize search in the same way as either Baidu or Google, but nonetheless, it is still taking market share.

In the month of June alone, Baidu’s share fell from 73% to 69.4%. Meanwhile, Qihoo’s share rose to 15.3% from 9.6% since October 2012. In an industry that is growing rapidly by itself, this stolen market share is sure to produce even greater growth.

Final thoughts

For those of you who think Qihoo is too pricey, you better think again. This is a company that is operating in an emerging industry, with peak potential that is at least four times greater than that of the U.S., and has the potential to double or even triple its margins long-term relative to Google and Baidu.

Much like Google captured the U.S. with a layout and a technology that people found more useful over the likes of Yahoo!, Qihoo is becoming the preferred choice over industry-leader Baidu, and the growth is proof.

Thus, as I look at the global search market, China is without question the most promising short-term, and Qihoo has the most upside potential, making it a good investment opportunity. 

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Brian Nichols Brian Nichols is long Qihoo. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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