Cheetah Mobile's (CMCM -6.40%) stock plunged over 40% this year, with most of the decline occurring in late February after Alphabet's (GOOG 4.16%) (GOOGL 4.20%) Google booted Cheetah's apps from its Play Store and advertising platforms.
Cheetah had repeatedly run afoul of Google's policies over the past six years, due to misleading ads and a "click fraud" scheme, in which ad clicks were " injected" into apps to juice ad revenue without real human clicks. Facebook (FB 1.83%) also suspended all of Cheetah's ads in late 2018 over similar allegations.
Those problems caused investors to dump Cheetah's stock, which currently trades 85% below its IPO price of $14. Unfortunately, Cheetah's latest fourth-quarter report suggests that the stock could head much lower in this ugly market.
How bad were Cheetah's numbers?
Cheetah's revenue plunged 56% annually to 612 million yuan ($87.9 million) during the fourth quarter. Excluding the deconsolidation of revenue from the live streaming platform LiveMe, which it no longer holds a majority stake in, Cheetah's revenue declined 47%.
Revenue from its utility products and related services fell 62% to 298.6 million yuan ($42.9 million) due to lower mobile app revenue in both China and overseas markets, as well as a decline in PC software revenue. About 80% of this segment's revenue came from ads, while the rest came from a la carte software sales and subscription services.
The business's overseas mobile utility app revenue dropped 69% annually to 92.8 million yuan, mainly due to Facebook's removal of its ads. It doesn't account for Google's recent suspension of its apps and ads, which occurred in the first quarter.
Cheetah's domestic mobile utility app revenue fell 70% to 106.5 million yuan, due to sluggish ad spending in China and tougher competition from rival platforms, while its PC revenue fell 26% to 99.4 million yuan as Chinese users pivoted from PCs to mobile devices.
Revenue from Cheetah's mobile games fell 13% annually to 285.1 million yuan ($40.9 million) due to a lack of hit games. That was also disappointing since market leaders Tencent (TCEHY -0.39%) and NetEase (NTES 2.47%) both reported robust growth in gaming revenue in their latest quarters.
How much uglier could things get?
Cheetah expects its first-quarter revenue, which reflects the full deconsolidation of LiveMe's business, to decline 50%-55% annually.
Google recently refused to reinstate Cheetah's Play Store, AdMob, and Google Ad accounts. During the conference call, Cheetah CEO Fu Sheng admitted that some of its apps had generated "invalid traffic," and warned that its partnership with Google was likely over.
Back in China, Cheetah faces intense competition from larger companies. Phone makers like Xiaomi already integrate first-party utilities -- many of which are similar to Cheetah's apps -- directly into their Android phones. Tencent and Alibaba also offer a wide range of mobile security and device management tools.
China's gaming market, which is dominated by companies like Tencent and NetEase, is also a tough market to crack. Last quarter, Cheetah generated 77% of its gaming revenue from ads, which have lower margins and less stickiness than in-app purchases and subscriptions.
This stock is dirt cheap for a reason
Cheetah's questionable behavior cost the company its overseas partnerships with Facebook and Google, and it now faces brutal competition from better-run tech giants with deeper pockets in its home market. Moreover, China's ad giants have recently ramped up their efforts to weed out click fraud, and Facebook and Google's actions against Cheetah could spark similar probes.
As its name suggests, Cheetah is a company that exhausted itself in a reckless sprint -- and it could now face devastating losses as it runs out of room to run. Cheetah's stock might look cheap at less than one times its annual revenue, but it's dirt cheap for obvious reasons. Investors should ignore this stock and stick with market leaders like Tencent, NetEase, or Alibaba instead.