As May’s trading action came to a close Chinese software company NQ Mobile (NQ) (née Netqin Mobile) spiked more than 15 percent, mitigating the losses of a disastrous year while adding yet another chapter to the story of one of the most controversial tech plays on the market.
NQ bulls found lots to get excited about on Friday, as the company announced two separate moves that would inject much needed capital. The Beijing-based NQ raised guidance for the quarter, now indicating they expected ot notch revenues totaling in the $75-76 million range, a 125 percent increase over the year prior. Concomitantly, the tech play announced they would be divesting from subsidiary mobile games publisher FL Mobile to the tune of $25 million.
Not terribly controversial on the surface. But according to a prominent fraud analyst, everything NQ Mobile claims is suspect, and any guidance notches or cash deals should be viewed as skeptically as the company’s allegedly inflated user base numbers.
“NQ’s Future is as Bleak as their Past”
That is in reference to a damning report issued late last year by respected short seller Muddy Waters, who in October called NQ a “massive fraud” and gave the company’s stock a less-than-exuberant price target of zero. That is, the company isn’t worth the paper their supposedly fabricated revenue data is printed on.
To delve into specifics, Muddy Waters claimed NQ’s market share was not the 55 percent they told Stateside investors, but rather closer to 1.5 percent. Misstatements of this nature amounted to, in Muddy Waters estimation, securities fraud.
Muddy Waters has a stellar track record of identifying accounting fraud in Chinese micro cap small-caps. Prior to targeting NQ, Muddy Waters levied fraud charges against Orient Paper (ONP) , a position that proved prescient when Orient Paper subsequently lost 80 percent of their value.
The Dog Ate NQ’s Earnings Report
The shots had been fired, and investors fled the stock in droves, sending shares downwards through the end of 2013. While those bullish on the company reinforced their positions in early 2014, Muddy Waters’ accusations were given additional ammunition in May, when the company failed to file their fiscal year 2013 earnings report. Excuses given as to why were flimsy at best, and willfully opaque at worst, with a press release explaining just that they “needed more time to complete it.”
So why the pop? Investors going long on NQ have to glom onto any positive news they can get. Raised guidance, the shedding of a subsidiary for cash, even a deal with American powerhouse Sprint (S) gets NQ’s stock going.
This is because if Muddy Waters, and the bearish investors responsible for the company’s massive 44.33 percent short float are correct, NQ could totally collapse at any time. And then it’s not just a matter of losing 57.72 percent, as investors who have been long on NQ since the beginning of the year would have experienced. But a 100 percent loss. Can’t do much worse than that.
But What if NQ is For Real?
It all hinges on NQ finally releasing their earnings report with hard data. Risk-takers who have stayed long on NQ are betting that somehow, someway, Muddy Waters is wrong. That’s why they latch onto these press releases that claim revenue bounces without evidence to back it up.
But if and when that evidence that NQ is legit surfaces, NQ could conceivably erase the year’s valuation loss, and thus double – or even triple. That’s a big “if.” But it’s enough to keep investors duking it out over a stock that, whether bull or bear, has certainly remained one of the more interesting plays in the entire tech sector.
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