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Why I'm Short Qihoo 360

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING ( TheStreet) -- Chinese Internet company Qihoo 360 (QIHU - Get Report) has been the subject of numerous fraud allegations over the past month in both public and private reports. Each time, the company has responded aggressively and the share price has remained basically flat.

During this time, I have spent a considerable amount of effort delving into the business of QIHU. Steps I have taken include: installing QIHU's antivirus software and browser on my Chinese-only computer, speaking with CFO Alex Xu for several hours on multiple occasions, engaging Internet consulting firm iResearch for a consulting session, and directly contacting QIHU's marketing department to replicate the experience of potential advertisers.

QIHU is a name which I am short due to its extreme valuation and due to the continuing implosion of all stocks that are Internet-related in China, so readers can feel free to take my observations with a grain of salt. However, for the record I wanted to point out the significant doubts that were raised during my experiences with iResearch and in trying to replicate the experience of a potential QIHU advertiser.

With a reported antivirus market share of nearly 90% and browser market share of over 55%, it would appear that QIHU rivals or surpasses the omnipresent Microsoft (MSFT) in terms of popularity in China. In fact, QIHU did recently reveal that its browser has surpassed Microsoft's Internet Explorer in terms of popularity, even though IE comes preinstalled on nearly every computer in China (while QIHU's browser does not).

As for my installation of QIHU's products, there is nothing special to report. These products are free and work as expected. QIHU does not generate any meaningful revenues from these products, but instead generates all of its revenues from its website hao.360.cn. I would encourage readers to take a close look at the page. Notably, there are no banner ads, no pictures and no actual content. It is just a page of simple links to other pages. The revenue that QIHU generates comes from advertisers who pay to post a link on the web page, as well as search referral revenue from Google and revenue-sharing with gaming sites who also have links on the page.
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