What happened
Shares of Cheetah Mobile (NYSE: CMCM), an internet company that owns a variety of internet properties, soared Friday morning. The stock rose as much as 94%. But as of 12:50 p.m. ET, shares were up closer to 10%.
The stock was so volatile on Friday that the New York Stock Exchange paused its trading a handful of times.
Shares have been volatile recently because the company announced a reverse split of its American depositary shares (ADSs) that was effective today.
So what
Cheetah, which is based in China, is traded using American depositary shares, which basically provide a way for investors to hold shares of foreign companies. Previously, one Cheetah ADS represented 10 shares. Last week, however, Cheetah Mobile said it would change that ratio, so that one ADS would represent 50 of its Class A ordinary shares, effective Sept. 2. Effectively, Cheetah Mobile ADS holders would see a 1-for-5 reverse split.
Just as stock splits have attracted retail investors and heavy trading volume in recent years, reverse splits seem to be doing the same thing. And given that Cheetah Mobile is a small-cap stock, trading volume has a larger impact on the stock price volatility than it would in a megacap stock like Amazon. So it's not surprising to see such extreme volatility in the tech stock on Friday.
Now what
Investors should stay focused on the company's underlying fundamentals. First, it is impossible to know how the stock will trade in the near term as traders continue to try to take advantage of the volatility. Second, an investment horizon of years rather than months increases the odds of Cheetah Mobile's underlying business performance, not trading activity, being the primary driver of returns. Of course, this assumes the stock is worth investing in in the first place. Investors should look at the company's recent earnings reports and its underlying financials to determine whether the stock looks attractive at its current price.
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