Can China's Cheetah Mobile hit pay dirt on the global mobile
While the jury is still out on the answer, the potential
forCheetah Mobile (
) to monetize its mobile business in a big way has sparked
investor enthusiasm over the provider of Internet security and
mobile tool applications.
Cheetah Mobile's shares have risen more than 40% since they
debuted on the NYSE on May 8.
The company provides mobile and PC applications that offer
security and anti-virus protection. It was spun off by Chinese
software company Kingsoft.
Cheetah Mobile is the No. 2 Internet security software
provider in China, with more than 362 million monthly active
users as of March 2014, according to iResearch.
The company provides its applications free to users and
generates most of its revenue from its legacy PC application
business in China. The company does so through traffic referrals
from its platform to e-commerce companies, by selling ads and by
providing value-added services such as online games.
'Huge' User Base
Monetization of its mobile applications is still very early
and small, says JG Capital analyst Henry Guo.
"The key to its future is the opportunity to monetize its
mobile business internationally," he said. "The reason why
investors love (the stock), we believe, is because of the
potential on the mobile side over the next several years. The
reason why investors see the potential is because it has a huge
mobile user base."
During the first quarter, Cheetah's mobile monthly active
users (MAUs) surged nearly five-fold from a year earlier to 222.5
million. About 63% of MAUs came from overseas markets, mostly the
U.S and Europe.
With a "mature" desktop business, Cheetah has transitioned to
a mobile focus over the last year or so, Guo says.
That's a good thing, says Renaissance Capital analyst Will
Preston, because "the future is in mobile."
"The lure of this company is they have this huge user base and
a very strong presence in mobile," Preston said.
He estimates that in three to four years Cheetah could have $1
billion in yearly revenue "because of the amount of their users
and the potential they have with their monetization
To put that number in perspective, consider that Cheetah had
only $123 million in revenue last year.
For now, however, mobile remains a pretty modest business for
Cheetah, though a growing one. In the first quarter, mobile
accounted for 17% of Cheetah's $50.8 million in total revenue.
That was up from 1.6% the prior year and 11.6% during the fourth
quarter of 2013.
The company's mobile lineup includes Clean Master, a junk file
cleaning, memory boosting and privacy protection application. In
March, Clean Master was the world's No. 1 mobile application in
the Google Play app store tools category by monthly downloads,
according to App Annie.
Another mobile application is Battery Doctor, used for power
optimization. It was the No. 1 mobile utility application in
China in terms of monthly active users in December 2013,
according to iResearch.
Among the ways Cheetah can monetize its mobile business
globally is with mobile games that it develops with local
developers, Guo says. The idea would be to launch "localized"
games that are attractive to users in key markets like Brazil,
where Cheetah has a large user base.
Cheetah took a step toward monetizing its mobile business in
June when it reached a deal to acquire HongKong Zoom Interactive
Network Marketing Technology for up to $30 million, including $20
million in cash and about $4 million in Cheetah stock, payable
upon the closing of the deal.
HongKong Zoom operates a mobile advertising business. It is an
authorized reseller ofFacebook (
) ads, one of the top resellers of Google (
) ads in Greater China, and a preferred partner for global mobile
advertising networks such as InMobi and Millennial Media.
"With this addition, Cheetah will be able to further expand
into the overseas market and explore new opportunities for
promoting and monetizing our mobile products," Cheetah CEO Sheng
Fu said in a statement announcing the deal.
Analyst Guo says the key difference between Cheetah and other
Chinese Internet companies is that Cheetah has strong
international brand awareness and a large international user
That is a positive in terms of its potential to monetize its
mobile business on a global scale.
But Guo has some concerns.
"The company has no proven record that it can monetize its
huge international user base," he said.
What's more, Guo adds, no Chinese Internet company has been
able to monetize its international user base before. It's not
easy, given the amount of competition between international
"It's too early to make a call," said Guo, who has a "Neutral"
rating on Cheetah. "I'm waiting on the sidelines to see if
there's any traction on international monetization."
Financially, Cheetah is doing well enough with its current
lineup of products. The company has delivered seven straight
quarters of triple-digit revenue growth.
In the first quarter, revenue climbed 131% from the prior year
to $50.8 million. Earnings came in at 4 cents per American
Depositary Share. Analysts polled by Thomson Reuters see
full-year earnings of 22 cents per ADS in 2014 and 65 cents in