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Cheetah Mobile's Ad Fraud Allegations Just Got (Even) More Serious

Steve Symington, The Motley Fool
Updated

If you thought Cheetah Mobile (NYSE: CMCM) had won back the confidence of investors following recent allegations of advertising fraud, the subsequent actions of Alphabet's (NASDAQ: GOOG)(NASDAQ: GOOGL) Google should make you think again.

Perspective is in order

But before we get there, recall Cheetah Mobile shares plummeted more than 30% in a single day after BuzzFeed highlighted research from app analytics firm Kochava accusing both Cheetah and fellow Chinese app maker Kika Tech of using an "ad fraud scheme" involving exploiting user permissions to implement "click injection" and "click flooding" within eight of their various apps. These are fraudulent practices that BuzzFeed noted "ensures these companies are rewarded an app-install bounty even when they played no role in an app's installation."

Cheetah, for its part, first pledged to investigate the issue, blaming third-party software development kits (SDKs) for any potential infractions, while adding that it "is dedicated to complying with all relevant Google policies, GDPR, laws and regulations."

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Cheetah then followed with a detailed rebuttal insisting Kochava's testing "contained fundamental mistakes, leading to a number of false or misleading conclusions." Finally, Cheetah Mobile revealed plans to take legal action against Kochava and any parties responsible for "[generating] and [disseminating] those untrue and misleading statements" (i.e., BuzzFeed).

Shares rebounded more than 20% the following day, indicating at least some level of investor satisfaction with Cheetah Mobile's response.

Stock market charts on a digital display with a yellow line indicating steep losses.
Stock market charts on a digital display with a yellow line indicating steep losses.

IMAGE SOURCE: GETTY IMAGES.

Google drops the hammer

On Monday, however, Cheetah Mobile shares resumed falling after Google removed two of the apps in question -- Cheetah's CM File Manager and the Kika Keyboard -- from its Play store. Google cited an internal investigation that identified "deceptive and malicious behavior" within those apps.

"We take these allegations very seriously and our Google Play Developer policies prohibit deceptive and malicious behavior on our platform," Google elaborated in a statement. "If an app violates our policies, we take action."

BuzzFeed called it a "huge blow" to both companies. And Kochava lauded Google's action as validating its findings, adding, "Advertisers need to be able to operate in an environment free from ad fraud."

Though to be fair, Cheetah Mobile followed up again on Tuesday, not to dispute Google's action, but instead to point out that CM File Manager was "temporarily suspended" and generated less than $58,000 in revenue for the company last quarter -- less than 0.03% of its total top line. Cheetah also stated it has temporarily taken down two of its other apps -- Battery Doctor and CM Locker -- on its own accord, albeit primarily because the "target APIs employed in those two apps are obsolete and would require some time to update."

But the worst could be yet to come. A Google spokesperson added on Monday that the tech giant has not yet finalized its own investigation and "expects to take additional action."

The bottom line

So where does that leave investors? Though Google's removal of CM File Manager will have a nominal negative impact on Cheetah Mobile's financial results, I think the action has already inflicted untold damage to Cheetah's rapport with both investors and its hundreds of millions of app users. Couple that with the looming threat of Google removing more significant apps going forward, and I think investors would be wise to watch this situation unfold from the sidelines.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares). The Motley Fool has a disclosure policy.