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Summary

  • CMCM will report Q2 on Tuesday with consensus expecting $0.03 EPS on $55m in revenue.
  • Key focus are mobile MAU growth and potential MAU monetization, which currently stands at 0%.
  • Long-term competitive risk from Baidu, Qihoo and Tencent a key concern.

Cheetah Mobile (NYSE:CMCM) will report its second quarterly result since the IPO on Tuesday. Consensus expects $0.03 in EPS on $55.3m in revenue. Details of the conference call are below.

United States:

+1-877-870-4263

International Toll Free:

+1-412-317-0790

China Domestic:

4001-201203

Hong Kong:

+800-905945

Conference ID:

#10050701

The stock has risen +35% since my bearish initiation on July 14th thanks to multiple positive broker research. However, at 142x forward P/E and close to 0% mobile MAU monetization rate, I continue to view CMCM valuation to be a stretch and that the euphoria is bound for a pull-back once the market realizes the structural and the competitive risk CMCM is facing. Unless I see meaningful mobile monetization of CMCM's 233m MAU base, I will remain a seller of the stock.

PC to drive near-term growth

I expect PC to continue drive near-term revenue growth for CMCM. As of 2013, PC accounted for 93% of CMCM's total revenue. However, the issue is that the Chinese digital advertising landscape is shifting from PC to mobile, and CMCM's mobile monetization is still relatively small compared with PC.

(click to enlarge)

Most important, investors should understand that much of the PC revenue is generated from ad and web traffic referral from its start-up page, Duba.com, and, to some extent, its anti-virus product, but this area is highly competitive, with Qihoo (NYSE:QIHU) already having a strong presence in the personal startup space and Baidu's (NASDAQ:BIDU) Hao123. In my view, CMCM does not have a clear advantage over Baidu and Qihoo, which enjoys either a first mover advantage or greater scale. That said, I do not see CMCM to have a sustainable growth profile in an already competitive market.

MAU monetization a long-term dream

Much of the positive views from the brokers are based on the prospect of MAU monetization, which currently stands at close to 0%. In this quarter, I will focus on the MAU growth and signs of MAU monetization.

CMCM's Clean Master mobile junk cleaner is spearheading its mobile monetization, but my analysis indicates that Clean Master lacks significant technology edge over the competing mobile junk cleaners from Qihoo, Baidu and Tencent (OTCPK:TCEHY) in terms of the amount of junk cleaned.

Clean Master's lack of technological sophistication will likely result in weak user loyalty, in my view. As such, I favor internet companies that have scale, broad product offering and financial resources, such as Baidu, Qihoo and Tencent, that can provide users with a consistent set of mobile solutions, rather than a niche tech player such as CMCM that lack significant competitive advantage.

I am a seller of CMCM heading into the results and believe that the current valuation of 142x FY14 EPS is priced for the best case scenario. The street may be supportive of the shares, as investors are likely to remain hopeful of an eventual monetization of the MAU base, but long-term downside risk remain, in particular from the competitive front.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Cheetah Mobile Q2 2014 Preview: No Room For Errors

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