Controversial Chinese tech company NQ Mobil (NQ) surged in Friday trading as the company continues to benefit from last week’s dismissal of auditor PricewaterhouseCoopers. PwC had been investigating reports that NQ had grossly overstated revenues, a charge led by famous short seller Carson Block of Muddy Waters, and one that had caused shares of NQ to lose four-fifths of their value in less than a year.
As recently as July 3, PwC had announced they were expanding the scope of the audit, a move interpreted by some to indicate that NQ was not complying fully with the independent audit. It's a moot point now though, as PwC has been relieved of their duties completely.
The release of PwC potentially frees up NQ to finally release their 2013 fiscal report, an eagerly awaited document that could very well clear NQ’s name.
Short-Sellers Still Not Convinced
Of course, the dismissal could just be another tactic by NQ to buy themselves time to cover their tracks. In an email to Reuters, Block claimed as much, saying "PwC's refusal to issue an audit opinion results from the fact (that) NQ is a fraud… by not issuing any opinion, PwC effected a backdoor resignation that attempts to save face for its client."
Block’s initial allegation, which first surfaced in October, sparked the sell-off and sizable short position on the company. While down from a high near 49% three weeks prior, NQ still maintains one of the highest short floats in the entire tech sector at 46.24%.
Bulls See Tons of Hidden Value
NQ would not be considered such a controversial stock if it didn’t have its share of defenders. American telecom megalith Sprint (S) believed in the company’s products enough as to offer them a lucrative deal in the midst of the Block allegations. From a fundamental perspective, NQ is massively undervalued. Based on its valuation as of July 25, NQ’s forward P/E is a miniscule 3.73, which is the lowest in the entire tech sector.
While the company cycles through auditors and the public awaits the release of its 2013 financial documents, NQ’s value sits in a sort of limbo. On the upside, there’s its “correct” valuation, or the stock price that would correspond roughly with a tech company that beat revenue estimates for 11 straight quarters and purports to take in $65 million a quarter. If those numbers are correct, NQ is worth closer to $25, or what it was valued at in October 2013 prior to the Muddy Waters release.
However, the company’s detractors would claim that most, if not all, of those blockbuster revenue beats that NQ claims quarter after quarter are fictitious. Despite the insistence of NQ’s first independent auditor Deloitte, whom Block dismissed as “just another in a long line of whitewashes carried out by China companies that are defrauding US investors, written by directors in China who have no accountability to U.S. authorities," the company is worth even less than its July 25 price of $6.73 a share. It’s worth, well, zero.
Something’s Gotta Give, But For Now...
The $6.73 price on NQ’s shares represents an uneasy truce of the market, one that neither prices NQ at a market value commensurate with its stated revenues nor confirms the allegations of chicanery and relegates it to worthlessness and the dustbin of investing history. One side or the other is correct in the matter. The question is, who will emerge triumphant? The company’s defenders or Block and his cohorts?
It’s a war that will continue raging for some time, but for the time being appears that neither side has scored a decisive win, and the company's market price reflects as much. The bulls did win the trading week, however, as shares for NQ gained 42.67%.
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