Cheetah Mobile: Last Chance Saloon
OrionStar robots need to be rolled out much quicker in the months ahead.
The CEO and the former president continue to do nothing for building shareholder trust in this play.
Shares though are trading for pennies on the dollar.
If the artificial space can gain more traction, this stock could easily double from present levels.
Intro
We wrote about Cheetah Mobile Inc. (CMCM) back in April of last year when we stated that the sustained investments in the AI space would eventually bear fruit for the company. A lot has happened between now and then but Cheetah's main objective up to that point was to build up AI aggressively in the Chinese market & overseas, find some stability in the PC & Mobile space while managing to the best of the company's ability, the eroding mobile game's business.
As we see from the technical chart below, although shares continued to print lower highs throughout fiscal 2022, the trend to the downside really accelerated after the first half. In fact, over the first six months, sales of approximately $53 million (Which was a 13% drop over the same period of 12 months prior), came in higher than expected considering the covid policy in China at the time & considerable macro headwinds. "AI & Others" grew to $12.2 million over the first six months of fiscal 2022 (50% growth rate) so if this trend can indeed continue (Considering $75 million approx is guided for sales in the back half of 2022), one would think that the market will take notice sooner rather than later.
However, as we see below, that impressive forward-looking guidance was dismissed pretty ruthlessly by the market over the back half of 2022 as shares kept on making lower lows. Two significant events which took place in the back half of the year were the reverse stock split as well as the insider trading charges on both Sheng Fu (CEO) & Mig XU (Former President). The latter event in the particular and the fact that shares are down close to 80% since we penned our most previous piece 11 months ago has resulted in many investors undoubtedly liquidating their Cheetah positions. We also took a loss soon after once shares began to break down. The question now is whether Cheetah offers value at its present juncture.
Timing Is Everything
The cardinal sin of value investors is not catching stocks on the way up. This mistake in the present environment gets compounded due to inflation remaining stubbornly high leading to both real & nominal losses. Suffice it to say, considering what has gone on before in Cheetah, the present ultra-low trailing book multiple of 0.13 is NOT a valid reason to own this stock. First, we would need to see Cheetah's 10-week moving average cross above its corresponding 40-week average with conviction and this would only be the starting point.
AI Tailwind
Ultimately, Cheetah's near-term potential will be closely associated with how fast the AI segment and specifically OrionStar (Cheetah owns almost a 40% stake) can continue to grow. Although OrionStar may be known more so for its 5G receptionist & retail robots, the company recently unveiled its updated Lucki PRO delivery robot which is bound to gain momentum in the likes of restaurant settings. The updated robot launched in January of this year comes to the market roughly 16 months after its successful predecessor so it will be interesting to see what the take-up will be like going forward.
Its predecessor (Lucki) is actually being used in approximately 1400 restaurants across Korea (Up to February) and won an appraisal brand award just a few months ago. The concept here is straightforward in a restaurant setting. By letting the robot primarily deal with customers at the table in terms of delivering and collecting meals, staff can get on with the areas that provide the most value which is providing quality food at competitive prices.
Whether the likes of Lucky Pro gain traction this year remains to be seen but what we do know is that business owners (especially in the current environment of high raw material & high labor costs) are far more in tune with respect to finding ways to generate a profit in order to stay in business. Suffice it to say, the more value that OrionStar can add to its robots over time, the more possibilities that the likes of Lucki Pro will go mainstream in the private sector especially when the machine has a designated return on investment. The updated model for example incorporates a much better interactive experience for customers who can carry more weight to and from tables and has much-improved mobility overall.
Conclusion
Cheetah Mobile has had a torrid time since its inception in 2014. Risk remains in this play because we really do not have detailed information on Cheetah's balance sheet which means the reported ultra-low book multiple is dubious, to say the least. We will continue to watch the technicals to guide us. We look forward to continued coverage.