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Google Just Pulled the Plug on This Controversial Chinese App Maker

By Leo Sun - Feb 26, 2020 at 9:34AM

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The tech giant finally kicks Cheetah Mobile’s apps to the curb.

Cheetah Mobile's (CMCM 3.85%) stock recently plunged after Alphabet's (GOOG 5.20%) (GOOGL 5.11%) Google banned all of the Chinese app maker's products from its Play Store and advertising platforms late last week.

That purge, which swept away 45 of Cheetah's apps, was part of Google's removal of nearly 600 mobile apps which allegedly violated its ad policies. Cheetah generated nearly 23% of its revenue from Google's platforms in the first nine months of 2019.

This a devastating setback for Cheetah, which already lost nearly 60% of its market value over the past 12 months as its revenue plunged and operating losses widened. Cheetah plans to appeal Google's decision, but its rocky relationship with the tech giant indicates that the company could be in serious trouble.

A young woman uses a smartphone.

Image source: Getty Images.

How did Cheetah Mobile lose its momentum?

Cheetah Mobile went public nearly six years ago. The Beijing-based company produces a wide range of mobile apps and games.

Last quarter, it generated 58% of its revenue from entertainment apps like games and live streaming services, 38% from mobile utilities like its web browser, security, and cleanup tools, and the remaining 4% from AI tools and other products.

Cheetah Mobile once seemed like a great growth stock, but it lost its momentum over the past four years as a series of controversies raised red flags regarding its business.

Fiscal year

2015

2016

2017

2018

2019*

Revenue growth

109%

21%

9%

2%

(28%)

Source: Cheetah Mobile financial reports. *Analysts' expectations.

A history of questionable behavior

Back in 2014, Google removed several of Cheetah's top apps from its app store rankings over misleading ads and strategies.

For example, it promoted its popular Clean Master app -- which claims to boost a device's performance by clearing out junk files and optimizing memory usage -- via popup ads with fake virus warnings. Users who clicked those misleading ads were directed to install the app. Cheetah also pushed users to uninstall Google Chrome and install its own CM Browser as part of its "optimization" process.

Smartphones and tablets, displaying various apps.

Image source: Getty Images.

Cheetah rectified those issues, but it was hit by a bearish report from Prescience Point in 2017, which claimed the company was reporting fake traffic and revenue figures. The firm claimed that Cheetah's financials didn't align with analytics firm App Annie's numbers, and warned that Cheetah's auditor had ties to fraudulent Chinese companies.

Cheetah refuted those claims, but its troubles continued in 2018 when it was implicated in a massive click fraud scheme. App analytics company Kochava discovered that seven of Cheetah's apps defrauded advertisers by "injecting" background ad clicks in its apps to generate passive ad revenue without a user's knowledge.

Cheetah denied the charges, but Google subsequently booted Cheetah's CM File Manager from the Play Store after an internal review. Cheetah also voluntarily removed its Battery Doctor and CM Launcher apps. All those brewing concerns likely convinced Google to finally pull the plug on all of Cheetah Mobile's apps.

Don't try to catch this falling knife

Analysts were already expecting Cheetah Mobile's revenue to plunge this year when it posts its earnings in late March, and Google's removal of its apps from its Play Store and ad network will likely result in a much steeper decline. Google's actions could also prompt Chinese app stores to take a closer look at Cheetah's apps.

Cheetah's stock looks cheap, but the company's declining revenue, operating losses, and shady practices make it a toxic investment. Moreover, the ongoing macro headwinds in China -- including the country's economic slowdown, the coronavirus outbreak, and the unresolved trade war -- will likely flush out weaker Chinese stocks like Cheetah Mobile.

Investors looking for a reliable play on China's mobile market should simply stick with bigger companies like Tencent (TCEHY 2.46%) and NetEase (NTES 3.02%), which both generate stronger growth than Cheetah Mobile without controversial growth strategies.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,359.50 (5.11%) $114.66
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,370.76 (5.20%) $117.07
Cheetah Mobile Inc. Stock Quote
Cheetah Mobile Inc.
CMCM
$0.79 (3.85%) $0.03
NetEase, Inc. Stock Quote
NetEase, Inc.
NTES
$93.60 (3.02%) $2.74
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$49.18 (2.46%) $1.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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