Cheetah Mobile: This Fast-Growing Chinese Internet Company Can Be A Growth Pick

| About: Cheetah Mobile (CMCM)


The growing demand for internet security and mobile advertising has opened up a big opportunity for Cheetah Mobile.

Cheetah Mobile is doing its best to tap the opportunity ahead with impressive product development and acquisitions.

Cheetah Mobile's growth projections are hugely impressive along with its forward valuation.

Cheetah Mobile (NYSE:CMCM) has stood true to its name in 2014. The Chinese company has sprinted up more than 90% in 2014, and this is not surprising considering the industry in which it operates and the growth that it is delivering. Cheetah Mobile is known for providing "mission critical applications that optimize Internet and mobile system performance and provide real time protection against known and unknown security threats."

As such, the company operates in a market that's expected to grow at a good rate in the future. For example, Internet security threats are growing by the day. According to a Symantec (NASDAQ:SYMC) report:

"2013 was year of the mega breach. Total number of breaches was 62% greater than 2012, with 253 total breaches. Eight breaches each compromised more than 10 million identities. In comparison, in 2012, only one breach exposed more than 10 billion, and in 2011, only 5 were that size. More than 552 million identities were breached in 2013, putting credit card information, birth dates, government ID numbers, home addresses, medical records, phone numbers, financial information, email addresses, logins, passwords and other personal information into the criminal underground."

Tapping the market effectively

Hence, Cheetah Mobile has a big addressable market to tap, and a look at its results indicates that it is doing the same. Cheetah Mobile reported splendid results for the second quarter as its revenue more than doubled compared to last year. The company was spun off from a Chinese software company, Kingsoft, with an IPO on May 8, and since its debut, the stock has doubled in just a few months.

In fact, its revenue for the quarter rose 139% to $61.3 million, which was better than the consensus of $55.8 million. This was the eighth consecutive quarter that the company reported triple-digit gains. Its earnings of 8 cents also topped analyst expectations, while mobile revenue increased a whopping 1,000% on a year-over-year basis. Hence, Cheetah Mobile is already enjoying solid growth, and a look at its strategic moves will tell us that its impressive performance should continue.

Product development and acquisitions will drive growth

Cheetah has launched various apps, including contextual native apps, that have fueled its mobile revenue growth. In addition, it has acquired Hong Kong Zoom Interactive, a mobile advertising business with a solid client base constituting of companies such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB), among others. With this new acquisition, Cheetah Mobile's mobile advertising business should get better.

This is a smart move by Cheetah as global mobile advertising revenue is expected to increase at a terrific pace in the future. According to Gartner:

"Global mobile advertising spending is forecast to reach $18.0 billion in 2014, up from the estimated $13.1 billion in 2013, according to Gartner, Inc. The market is expected to grow to $41.9 billion by 2017. Gartner said that display formats will make up most of the revenue, but video will show the highest growth."

More importantly, its apps have received positive responses from users. In fact, Cheetah Mobile was the number two brand in the Google Play non-game app categories worldwide. In addition, its Clean Master and CM Security apps bagged the top spot in AV-Test's assessment of Android security for the fourth time during the year. As a result of its cutting-edge apps, more than 20 handset makers have preloaded Clean Master on their devices. Looking ahead, management believes that its increasing brand awareness will lead to more such partnerships with handset makers.

Moreover, Cheetah Mobile has launched its latest mobile browser, the CM Browser, which is both light and fast. In a short span, the browser became one of the top 40 most downloaded mobile apps in Google Play during the month of July. Since the company has added various updates to its existing apps with a numbers of new features, it should continue gaining traction in the market.

The company has also entered into an agreement with Hong Kong Youloft Technology to acquire around a 51.9% equity stake in it. Youloft mainly deals in the Wannianli series of mobile applications, and this is another step for Cheetah toward growth.

Going forward, management plans to strengthen its presence in the U.S. and European markets, with further expansion in its mobile platforms. Cheetah also is looking forward to deepen its strategic relationship with leading internet app and mobile internet companies globally.

Risks to watch for

However, investors need to be aware of the risks that come along with an investment in Cheetah Mobile. First, the company will face threats from Chinese Internet player Qihoo 360 Technology (NYSE:QIHU), which operates in the same space. Recently, Qihoo tied up with Microsoft (NASDAQ:MSFT) to make its offering better in mobile Internet and artificial intelligence technology.

Given that Microsoft's Windows operating system has a wide reach, Qihoo will be able to reach a broader audience. Hence, this is a threat for Cheetah. At the same time, Cheetah trades at a highly expensive trailing P/E of 365.21 and a price to sales ratio of 18.7. So, investors will have to pay a high multiple to benefit from its growth.

Fundamentals and conclusion

But Cheetah has an impressive forward P/E of 36, reflecting earnings growth in the future. The company's PEG ratio of just 0.77 also is worth noting. Next, Cheetah is a debt-free company with $314 million in cash, giving it the flexibility to invest in growth. Finally, over the next five years, its bottom line is expected to grow at a CAGR of 130%.

So, investors should definitely consider this growth stock for their portfolio.

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.