Run for Your Lives! Cheetah Mobile Stock Is Volatile
Cheetah Mobile (NYSE:CMCM) is a leading mobile Internet company with approximately 362 million monthly active users in March 2014. Its mission is critical applications, including Clean Master, CM Security, Battery Doctor, and Duba Anti-virus, help make the internet and mobile experience speedier, simpler, and safer for users worldwide. Cheetah Mobile is the second largest Internet security software provider in China by monthly active users as of March 2014, according to iUserTracker of iResearch. Its stock has moved with volatility surrounding press and earnings releases. However, with the growth of its market capitalization to over $2 billion, is it time to seriously consider a long-term investment in the name?
An investment in Cheetah Mobile exposes an investor to the whims of monthly active users, meaning that the company has to keep it fresh to deliver earnings. Earnings have been rather solid. In the first-quarter of 2014 its total revenues increased by 131.6 percent compared to last year to $50.8 million. This increase was primarily due to the increase in revenues from online marketing services. Revenues generated from its mobile business increased to $8.6 million resulting from the increased acceptance of the company’s mobile marketing services and the growth of its mobile gaming services.
Mobile revenues as a percentage of total revenues for the first-quarter was 17.0 percent compared to 1.6 percent in the prior year period. Revenues from online marketing services increased by 97.2 percentto $37.4 million. This increase was due to growth in marketing revenues from key online marketing customers driven by significant growth in its user traffic on the company’s online marketing platforms. However, revenues from internet security services and others decreased by 17.2 percent to $1.9 million in the quarter. This decrease was primarily due to the company ceasing to promote subscriptions services to paying users in a strategic reorientation, which started in 2011, resulting in a decrease in the number of paying customers. Net income decreased by 35.9 percent$3.0 million. Net margin decreased to 5.9 percent from 21.4 percent in the prior year period. Adjusted net income decreased by 4.8 percent to $5.3 million. Finally, adjusted net margin decreased to 10.4 percent in the first-quarter of 2014 from 25.3 percent in the prior year period.
Cheetah Mobile’s cost of revenues increased by 203.8 percent to $11.3 million in quarter. The increase in cost of revenues was mainly driven by higher bandwidth and IDC costs as well as sharing and content costs. Bandwidth and IDC costs increased as a result of the growing user base and user traffic. The increase in sharing and content costs was primarily associated with the strong performance of licensed mobile game titles. Gross profit increased by 116.8 percent to $39.5 million in quarter. However, gross margin was 77.7 percent in the first-quarter of 2014 compared with 83.0 percent in the prior year period. Total operating expenses for the first-quarter of 2014 increased by 148.8 percent to $36.4 million primarily due to an increase in research and development expenses, selling and marketing expenses, and general and administrative expenses. Research and development expenses increased by 101.0 percent. Selling and marketing expenses increased by 187.0 percentand general and administrative expenses increased by 176.3 percent.
While the user base is growing for Cheetah Mobile, I am struck by the significant year-over-year decline in earnings coupled with the year-over-year increase in nearly all expense categories. In fact, it is a bit concerning for a growing company. While the company shows promise given its growing user base, these financials suggest the stock is to be avoided. My sentiment is a sell on this name and I assign a $10 price target.
Disclosure: Christopher F. Davis holds no position in Cheetah Mobile but may initiate a short position in the next 72 hours. He has a sell rating on the stock and a $10 price target.