Credit Suisse Downgrades Cheetah Mobile To Underperform

Although Cheetah Mobile Inc (ADR) CMCM reported in-line revenues for 1Q16, its adjusted EPS of RMB 0.71 was short of expectations. Credit Suisse’s Evan Zhou downgraded the rating for the company from Neutral to Underperform, while reducing the price target from $18 to $8.50.

Disappointing 2Q Guidance

Cheetah Mobile guided to 10-13 percent y/y revenue growth for 2Q, which is 23 percent lower than the consensus expectations of Rmb 1.3 billion. The disappointing EPS guidance is attributable to a major change of the Facebook Audience Network [FAN] algorithm leading to a lower-than-normal ad CPM.

“We are disappointed by management’s operational fault of not being able to communicate timely,” analyst Evan Zhou mentioned. He expects the contribution of FAN to Cheetah Mobile’s ad revenues, currently estimated at 25-30 percent, to remain subdued over the next three quarters.

Zhou pointed out that Cheetah Mobile would need time to ramp up its content-driven new apps with investments required in R&D headcount, promotional spend and direct salesforce. This makes the bottom-line visibility for the next quarter very low.

The adjusted diluted EPS estimates for FY16 and FY17 have been reduced by 76 percent and 66 percent, respectively, due to the downward revision in the company’s growth outlook and increased investment in new products.