Qihoo is targeting Xiaomi with this new phone, which is unsurprising given the popularity that theworld’s most valuable startup is enjoying around the world. In fact, the slogan on the 360 Mobile website means "This operating system is probably more suitable for Xiaomi phones than Xiaomi’s own MIUI OS” (这可能是比MIUI更适合小米的OS). 

This is an important move by the firm, because I have discussed how Qihoo needs to move away from search and diversify into other business lines. With search, there is a glass ceiling because Baidu will never surrender significant market share to its rivals. Therefore, Qihoo has been actively focusing on its hardware and security products, as the firm concentrates on the security aspect of China’s Internet Of Things revolution. 

As these business lines generate revenue, it takes pressure away from management to increase search monetisation, which it has been reluctant to do too quickly.

I have previously discussed that China’s tech firms are developing their own mobile operating systems in order to build a closed-loop mobile ecosystem. We have seen that, along with Qihoo’s partnership with Coolpad, Alibaba and Baidu have set up similar partnerships withMeizu and Lenovo respectively, and this is a trend that I expect to see developed throughout 2015. Tech firms form these partnerships in order to preload smartphones with their apps, and to build their mobile-user base. By developing a mobile operating system, it builds the mobile user base further, because even if users do decide to download rival apps, the OS continues to collect data on users, which can be monetised.

Since my previous trade view last week, Qihoo has rallied 10.9% from $46.32 to last night’s close of $51.39, and I believe that this rally is a result of Qihoo showing investors that it is actively monetising its user base, through search and product diversification. Should we see further announcements that demonstrate this prior to the first-quarter earnings, Qihoo should continue to rally.

Management and risk description

Qihoo reached a low of $45.28 on March 2 and while the 13.5% rally has been promising, given the short space of time, investors may be waiting for the first-quarter earnings release before we see a sustained rally. I have set the duration of this trade for 3 months in order to cover the next earnings release, as management should give further discussion on the Coolpad partnership.

While Alibaba has developed its own mobile operating system for Meizu phones, Baidu has recently closed its own operating system because demand for Android and iOS was too high. Qihoo’s strategy is more similar to that of Alibaba, but the Baidu experience shows it can be very difficult to build market share in the mobile operating system market.

Original post at tradingfloor.com