Shares of Cheetah Mobile Inc Pounce, but This Cat Could Be Dangerous

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares of Cheetah Mobile Inc rose as much as 16% on Tuesday after the Chinese mobile Internet company announced first-quarter results that exceeded analysts' consensus estimates and offered better-than-expected revenue guidance for the current quarter.

So what: Here's how the headline numbers shook out:

Actual

Analysts' Consensus Estimate

Q1 Revenues BEAT

% Surprise

$108.5 million

+3%

$105.5 million

Q1 Earnings-per-ADS* BEAT

% Surprise

$0.09

+29%

$0.07

Guidance

Analysts' Consensus Estimate

Q2 Revenues

$126.6 million-$128.2 million

$127.0 million

*Adjusted
Source: Thomson Financial Network, Cheetah Mobile

Sheng Fu, Cheetah Mobile's CEO, sounded a very optimistic note in his comments on the quarter (CEOs are genetically predisposed to be optimistic):

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Started only two years ago, our mobile monetization, especially in overseas markets, has already become our main source of revenue and a key growth engine for us ... for the first time in our operating history, mobile revenues accounted for a majority of total revenues, a major milestone toward achieving our mobile and global transformation goals.

That's all well and good with regard to revenues -- 113% year-on-year growth is impressive, no doubt about it. However, when it comes to the bottom line -- which is what share valuations are based on, after all -- I think it's worth nothing that if one subtracts the share-based compensation expense from the company's first-quarter adjusted earnings-per-ADS (as one ought to), it reduces earnings-per-ADS by a whopping two-thirds, from $0.09 to $0.03.

Now what: Combining mobile Internet and China, Cheetah Mobile is a hyper-growth story through and through. When that story meets/exceeds investors' expectations as it did today -- all is well. However, at a valuation of 164 times forward earnings and 69 times cash flow, per research firm Morningstar, the shares appear to be balanced on a razor's edge. To this value investor, Cheetah Mobile looks like a speculation that carries significant risk of a permanent capital loss. There is nothing wrong with putting money in a speculation per se just as long as one understands the nature of the venture.

The article Shares of Cheetah Mobile Inc Pounce, but This Cat Could Be Dangerous originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.