Anyone researching Cheetah Mobile Inc. (NYSE:CMCM) might want to consider the historical volatility of the share price. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
What CMCM's beta value tells investors
Given that it has a beta of 1.77, we can surmise that the Cheetah Mobile share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Cheetah Mobile shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Cheetah Mobile's revenue and earnings in the image below.
Could CMCM's size cause it to be more volatile?
Cheetah Mobile is a small company, but not tiny and little known. It has a market capitalisation of US$556m, which means it would be on the radar of intstitutional investors. It is quite common to see a small-cap stock with a beta greater than one. In part, that's because relatively few investors can influence the price of a smaller company, compared to a large company.
What this means for you:
Beta only tells us that the Cheetah Mobile share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as Cheetah Mobile’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CMCM’s future growth? Take a look at our free research report of analyst consensus for CMCM’s outlook.
- Past Track Record: Has CMCM been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CMCM's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how CMCM measures up against other companies on valuation. You could start with this free list of prospective options.
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