I focus here on price-to-sales because both SINA and QIHU have recently posted one-time losses that make earnings not meaningful. But looking at it a different way, QIHU posted net income of just over $10 million in the third quarter, down from $11 million in the second quarter. Revenues are expected to increase by around 20% in the fourth quarter, so if earnings stay in line, that would give us about $12 million in fourth-quarter earnings.
Even if QIHU meets or beats these numbers, the current market cap of $2 billion still places the company on a PE of nearly 50 times earnings which compares to SOHU which trades at of around 11 times earnings. And in fact, this ignores the fact that SOHU owns 68.5% of Changyou.com (CYOU). That stake is worth nearly $500 million at current prices, making the effective PE for SOHU roughly 8 times earnings. Clearly SOHU and QIHU are not owned by the same investors. In fact, a long SOHU short QIHU trade is starting to look quite compelling.
Similar to YOKU, the long thesis is that QIHU may actually start making real money in the future, either through the Internet search business or through monetization of its mobile strategy. However, unlike QIHU, management has already indicated that this is likely to be as much as two years away. Given the difficulties in the current environment for Chinese Internet stocks, I see it as being highly unlikely that investors will give any company a two-year grace period and similar to YOKU, I expect the Chinese Internet downdraft will take QIHU down to the $5 to $8 level in coming weeks.
Overall, I believe that the easiest way to grasp the valuations in the Chinese Internet space is to focus on market caps. As shown in the table below, QIHU is the fifth-largest U.S.-listed internet company in China by market cap. However, QIHU is still only earning about $10 million per quarter, dramatically less than any of its market cap peers. In addition, within the Internet space, fully ½ of the names are trading at below $1 billion in market cap, less than half of where QIHU is. Like YOKU, QIHU has a long ways to fall.