Morgan Stanley Still Bearish On Cheetah Mobile

Cheetah Mobile recorded a non-GAAP net loss for the first time since its IPO, Rmb62 million, owing to increased investments in content products and investment impairment. The revenue, however, grew 18 percent to Rmb1 billion, topping consensus and Morgan Stanley's estimate by 6 percent, driven by improving product offerings and direct sales effort.

The company guided for 3Q16 revenue of Rmb1,100 billion–1,150 billion, slightly better than Morgan Stanley's estimate. The midpoint implies 9 percent year-over-year or 7 percent sequential growth.

Related Link: Cheetah Mobile Announces Second Quarter 2016 Unaudited Consolidated Financial Results

"Optimistic 3Q guidance is supported by diversified ad revenue stream, but cost structure is higher. We're encouraged by the revenue recovery trajectory but cautious about near-term profitability," analyst David Sun wrote in a note.

Although the analyst acknowledged the company's revenue expansion efforts, Sun expects gross margin pressures as the company's revenue mix shifts to slow-margin 3P ad platform and content products.

The analyst raised his revenue forecasts 5 percent for 2016, 6 percent for 2017 and 7 percent for 2018 to factor in the incremental revenue contribution from new initiatives. The cuts in non-GAAP EPADS estimates (by 50 percent for 2016, 38 percent for 2017 and 33 percent for 2018) reflect higher investment assumptions in content products.

Sun also raised his price target by $0.50 to $9, while the ADRs of Cheetah Mobile closed Friday's regular trading session at $11.75.

Full ratings data available on Benzinga Pro.