Embodied AI Robots And AI Agents Will Drive Long Term Upside Potential

Catalysts

About Cheetah Mobile

Cheetah Mobile is a China based technology company building AI powered robots and AI native software tools for global customers.

What are the underlying business or industry changes driving this perspective?

• Scaling of voice enabled wheel robots in China, supported by a rapidly expanding contract backlog and repeat orders, may translate into sustained revenue growth and higher operating leverage as production scales.
• Global adoption of embodied AI and collaborative robotic arms in manufacturing and commercial settings, combined with Cheetah Mobile's overseas focused arm business, may support a mix shift toward higher margin industrial revenue and improved net margins.
• Growing enterprise and consumer use of AI agents in everyday workflows, together with Cheetah Mobile's AgentOS platform and integration with leading foundation models, may enable premium pricing and higher subscription based earnings from AI robots and tools.
• Falling AI development costs through AI coding tools and a leaner cost structure allow faster product iteration in AI utilities and productivity apps, which can expand the subscription base and increase recurring Internet revenue and cash generation.
• Disciplined capital allocation, the level of cash and long term investments, and a focus on ROI positive AI initiatives may help the company fund growth in AI segments without diluting shareholders, which could support long term earnings growth and a potential re rating of the stock.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Cheetah Mobile's revenue will grow by 22.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -40.2% today to 19.0% in 3 years time.
• Analysts expect earnings to reach CN¥374.1 million (and earnings per share of CN¥1.84) by about December 2028, up from CN¥-433.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, up from -3.3x today. This future PE is lower than the current PE for the US Software industry at 32.9x.
• Analysts expect the number of shares outstanding to grow by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The recent return to quarterly operating profit after 6 years of losses may prove cyclical rather than structural if AI and other initiatives fail to scale profitably, which would pressure future earnings and net margins.
• Rapid growth in voice enabled wheel robots and robotic arms depends on sustained demand in China and overseas. Increased competition, pricing pressure or slower than expected adoption of embodied AI could stall contract backlog growth and reduce revenue.
• The strategy to leverage third party and open source AI models lowers development costs today, but exposes Cheetah Mobile to platform risk and potential changes in access or pricing from partners such as global cloud providers. This could erode gross margins and raise operating expenses.
• The AI tools and subscription based Internet businesses are still in early stages and may face saturation, higher user acquisition costs or weaker willingness to pay than small scale tests suggest. This could limit recurring revenue growth and keep overall profitability fragile.
• Continued capital allocation into AI robots and AI tools, despite strong cash and long term investment balances, may not achieve adequate returns if key use cases do not mature as expected. This would depress long term earnings and constrain valuation expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $9.0 for Cheetah Mobile based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CN¥2.0 billion, earnings will come to CN¥374.1 million, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $6.72, the analyst price target of $9.0 is 25.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.