Cheetah Mobile Inc. (NYSE:CMCM) Held Back By Insufficient Growth Even After Shares Climb 27%

Cheetah Mobile Inc. (NYSE:CMCM) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, Cheetah Mobile may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.3x, considering almost half of all companies in the Software industry in the United States have P/S ratios greater than 5.5x and even P/S higher than 12x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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Check out our latest analysis for Cheetah Mobile

What Does Cheetah Mobile's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Cheetah Mobile has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Cheetah Mobile's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Cheetah Mobile's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Cheetah Mobile's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. As a result, it also grew revenue by 15% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.0% during the coming year according to the sole analyst following the company. That's shaping up to be materially lower than the 16% growth forecast for the broader industry.

With this information, we can see why Cheetah Mobile is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Even after such a strong price move, Cheetah Mobile's P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Cheetah Mobile maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Cheetah Mobile with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.