A decisive battle over one of the most hotly contested tech investments on the market was won by the bulls on Wednesday, causing scores of investors who bet against the company to lose millions of dollars.
NQ Mobile (NQ) , née Netqin Mobile, released a report form an independent committee in which their user base, previously considered fraudulently, is quite verifiable. This was a significant turn for a company that has been dogged by allegations of impropriety since last year.
NQ Mobile a “Massive Fraud”
The Beijing-based software company has been a battleground stock since last September, when famed short-seller/fraud-rooter Muddy Waters issued a damning report that levied a laundry list of complaints against them. Besides calling their anti-virus products essentially useless, Muddy Waters alleged that NQ had overstated their customer base by a magnitude of 20 and had grossly overestimated both revenues and future earnings.
To add a dramatic flair to the presentation, they gave NQ a price target of zero, which is a roundabout way of saying the company is literally worthless.
A bevy of investors latched onto the allegations, raising the company’s short float, or the percentage of ownership representing bets that the company’s to stock price would fall, to one of the highest in the entire market. While the portion of that owned by Muddy Waters is unclear, as short-sell analysts are not required by law to disclose their short positions, it can be safely assumed that their calls were heeded by a large portion of the market, as the issuance of the report caused a sudden, massive drop for the company’s share price. Poor earnings projections in April further dampened NQ investor confidence.
Since then, NQ’s actions have been highly suspicious, with the company failing to release their 2013 fiscal year earnings report on time without a reasonable excuse for its tardiness.
The Bulls Staked Their Claim
Not everyone was convinced however, with hopeful investors buying in after the freefall, hoping that if Muddy Waters' allegation proved fruitless, NQ was positioned to realize major gains.
The company had previously scored a crucial deal with Sprint (S) to outfit Android phones with its software. This deal materialized after the Muddy Waters allegations, indicating that not just American investors, but a giant telecom interested in making money by going long believed NQ’s user base was as sizable as they claimed.
On April 30, accounting firm Deloitte, in conjunction with law firm Shearman & Sterling, affirmed that they believed NQ’s revenue claims were not out of the ordinary, saying that “the Investigation Team has thus far found no evidence that the Company engaged in the fraudulent conduct that was alleged by Muddy Waters.”
And of course, NQ itself has been none too happy with the allegations, threatening legal action against Muddy Waters for how their allegations negatively affected NQ’s share price.
The hopes of those bullish on NQ have been realized, at least partially, with Wednesday’s stock pop. The slightly restrained (by their standards) stock movement can be attributed to investors slightly hedging, and shorters refusing to back down.
Muddy Waters: “Just Another Long Line of Whitewashes”
Muddy Waters is not budging on their original assessment, though. In an email to Reuters, Muddy Waters founder Carson Block said that "This press release is just another in a long line of whitewashes carried out by China companies that are defrauding U.S. investors, written by directors in China who have no accountability to U.S. authorities."
In that, Block may have a case. Several Chinese tech companies that trade shares in the US are notorious for having engaged in securities fraud, making growth plays from that country favored targets of short-sell analysts.
The fate of NQ Mobile, whether it be vindication or insolvency, still remains unclear. But the bulls undoubtedly scored a decisive victory in the market, leaving the ball in the shorters court for now.
By 3 PM EST shares of NQ had risen 38.14 percent to hit $10.57 a share.
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