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Shares of Baidu (NAS: BIDU) moved lower on Tuesday after Deutsche Bank updated its channel checks on China's booming search engine market.
Deutsche Bank's research shows that Qihoo 360 (NYS: QIHU) is once again gaining market share at Baidu's expense.
It was Deutsche Bank that alerted stateside investors to the emergence of Qihoo 360 in China earlier this summer. Qihoo 360 -- a provider of a popular Web browser and online security tools -- booted Google (NAS: GOOG) as its search partner, replacing the global leader with Qihoo 360's own search solution.
The surprising initial spike in popularity led Deutsche Bank to downgrade shares of Baidu, aggressively lowering its price target from $186 to $137.
The good news for Baidu is that Deutsche Bank still sees Baidu commanding 75% to 80% of China's search market. The slight gain in market share at Qihoo 360 is also compared to a subsequent channel check. Qihoo 360 is still below last month's initial boost in market share.
However, the recent gain can't be ignored. There may be more than just a novelty or curiosity factor at play here.
Baidu is big enough to acquire Qihoo 360 or fight back with anti-virus tools of its own. It recently rolled out an Android-based mobile browser called Baidu Explorer.
The one thing that Baidu can't do is ignore Qihoo 360. The market didn't flinch when Google entered the market, and the heady growth by Sohu.com's (NAS: SOHU) Sogou search engine has never really gotten in the way of Baidu's market dominance. Qihoo 360's share of the market is between 5% and 10%, and that clearly isn't enough to dissuade advertisers from moving away from Baidu. However, until Qihoo 360's market share settles, there will be a fair degree of uncertainty.
Baidu's next quarterly report -- historically released in late October -- may be the company's most important earnings release in years.