NQ Mobile Inc. ($NQ) née NetQin Mobile has saw shares pop almost 35 percent by mid-afternoon on Tuesday in response to news that the company was transferring approximately $100 million in term deposits to Standard Chartered Bank (SCBFF) as part of an effort to prove the company's financial health through greater transparency. NQ’s shares had dropped precipitously after noted short-sellers Muddy Waters initiated damning coverage last Thursday, assigning a “sell” rating and a price target of zero while labeling the company a “massive fraud.”
The company's shares also got a big boost from the announcement that China Mobile (CHL) would be licensing its music search technology for Migu Mobile Music Service. It was a busy day for NQ, as Tuesday also brought news that Apple (AAPL) was removing its games from the Apple App Store, but this didn't appear to significantly damper the rediscovered investor enthusiasm.
Investors May be Buying New Tranparency
NQ Mobile has been scrambling to shore up its share price since the stock went into freefall last week, scheduling a Friday press conference to refute the claims in the Muddy Waters’ report. Now, the company’s move to shift assets appears to have soothed the worries many had after the Muddy Waters report.
"We remain diligently focused on running our operations and our entire organization and management team is extremely committed to financial transparency,” said co-founder and co-CEO Dr. Henry Lin. “An important step in this process is earning the complete trust of anyone seeking to validate our cash positions. Our actions speak louder than anyone's words and all other arguments and falsehoods fall by the wayside as our cash position is completely and independently verified. We will vigorously defend our company and our products for the benefit of our partners, our customers, and especially our shareholders."
China Mobile’s vote of confidence also appears to be a big step as the company fights to regain its lost value.
“As NQ Mobile continues to expand and offer a broad spectrum of mobile internet services, this deal with China Mobile is a solid testament to our mission and our technology,” stated Lin. “We are extremely proud that our solution has been selected by China Mobile for integration into their popular mobile music platform. This deal reinforces the superiority of our technology and highlights NQ Mobile’s status as partner of choice for cutting-edge, high-growth wireless services.”
NQ Mobile a "Massive Fraud?" Not So, Say Analysts
Muddy Waters, who is owned by Carson Block, concluded that that the mobile company was a house of cards due to collapse at any time in its 81-page research report released on October 24.
“NQ is a massive fraud,” the report opens. “We believe it is a ‘Zero’. At least 72% of NQ’s purported China security revenue is fictitious. NQ’s largest customer by far is really NQ. Its real business with carriers and SPs is a fraction of what NQ purports. NQ’s online payment portal does not work – it is cosmetic only, designed to make investors think that NQ is a real company. NQ’s prepaid card channel is a bad joke. We estimate that NQ’s real market share in China is about 1.5%, versus the approximately 55% it purports. We estimate that NQ’s paying China user base is less than 250,000, versus the approximately six million it purports. This fraud and the undisclosed related party transactions amount to securities fraud. We have already provided the SEC with information concerning NQ.”
The short float on the company increased dramatically, and as of Oct. 28 it stood at 42.14 percent. At the time the Muddy Waters report was issued, shares of the mobile software security company were trading at around $22 a share. On the day of the release, though, NQ’s stock tanked, dropping 54.55 percent to below $10 a share. They continued to plummet on Friday and Monday, with losses exceeding 60 percent before Tuesday's strong bounce back.
However, the over-exuberance of the shorters has apparently been checked, as not every analyst is in agreement that NQ is destined to decline in value, let alone fail. Analytical house Macquarie initiated coverage on Oct. 17, assigning a rating of “outperform,” saying they expect the company to get a boost from the licensing deal with China Mobile. Even Oppenheimer, who downgraded the company to “perform” on Oct. 25, say the company has at least some worth that far exceeds “zero.” Indeed, the analyst consensus on the stock is still "strong buy."
NQ has had a curious year on the market. Shares of the company more than tripled between July 2013 and mid-October, before the Muddy Waters report initiated the second short frenzy. In December, NQ also dealt with fraud accusations from a short seller, after FJE Research asserted the company had greatly inflated their reported user base.
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