Round 2, Fight! Citron Attacks Qihoo 360 Again, Branding It a “Fraud”

Qihoo 360's main portal which is at the centre of this latest ad revenue "fraud" claim by Citron.

Citron Research, the short-sellers and analysts, has attacked the Chinese anti-virus vendor Qihoo 360 (NYSE:QIHU) as a “fraud” whose bulk of business is an “illusion” of ad-filled websites which might not be generating as much revenue as the company claims. Citron compares Qihoo to China MediaExpress (NASDAQ:CCME – now suspended), the advertising agency which was delisted in May of this year after exposés by both Muddy Waters and Citron itself.

It’s a follow-up on a previous post about Qihoo at the beginning of this month in which Citron slammed the company as “overvalued.” But that post was largely discredited and even mocked by many observers – including this site – who pointed out factual errors and suggested a deficiency of logic in comparing a software firm to random Chinese media portals.

And so Citron, in its latest missive, says it stands corrected on its previous comparison, and instead likens it to China MediaExpress in terms of claimed duplicity and lack of depth to its business. Qihoo has not yet responded to the new attack, though it did so promptly on the previous occasion.

“Internet value-added services”

This time, Citron focuses on what Qihoo stated were its main revenue sources in its business prospectus: “generating revenues through providing Internet services, including online advertising and Internet value-added services.” This is complementary to its now free suite of anti-virus software, and its other apps such as a web browser and the Kouxin group-messaging service.

Citron contends that Qihoo’s “$40 million revenues this quarter” from advertising is impossible (especially its reported 400 percent year-on-year increase) because its hao360.cn portal links – this is Citron’s angle – to just about the same amount of links that it always does. The short-seller then shows a bunch of screenshots of the site and makes the judgement that this ad revenue claim is fraudulent on the basis of that.

One claim that needs investigating is that some of Qihoo’s portal links are for advertisers “that we believe do not pay QIHOO one dime” – such as Amazon, and the NBA. It seriously needs to be verified if Citron knows this for a fact, since there’s the strong likelihood that Citron has no actual clue what the China divisions of Amazon and NBA – for it’s not the US HQ who’re signing these ad deals – are doing.

A “Hit Job”

The Beijing-based business expert Bill Bishop – who blogs as Digicha – was unimpressed by the new Citron blog post, describing it this morning on his @niubi Twitter account as a “hit job” on Qihoo filled with “intentional distortion.” He also questioned the inaccurate screenshot, asking @citronresearch if PhotoShop might’ve been used to mis-represent what Qihoo’s main portal looks like. Since Citron is pretty lax with its tweeting, no reply came.

Qihoo’s shares dipped somewhat in the immediate aftermath of the last Citron post – although it’s debatable if the attack was a factor – but have since returned to their late October levels, closing up yesterday at $20.40 per share.

[UPDATED the lead image]