China Web Stock NQ Mobile Rebounds After Short Attack

By
A A A

Chinese Web security firm NQ Mobile stumbled last year in the wake of fraud allegations from a U.S. short-selling firm, but has since announced several international mobile partnerships. Word of them has helped the stock recover some lost ground.

NQ ( NQ ) makes mobile software and has dual headquarters in Beijing and Dallas.

The company's signature product is mobile-security protection for smartphones, many of which run theGoogle ( GOOG ) Android operating system. NQ's product works like a software skin, essentially taking over and securing a smartphone against threats. A user unlocking his phone will see NQ's software along with the phone's other apps.

The software has several built-in security features. Say, for example, that someone steals your phone -- NQ's software will take a picture of the thief when the person tries to unlock it, then email that photo to you.

Customers And Questions

At the close of NQ's last reported quarter, ended Sept. 30, 2013, the company boasted that it has some 427 million registered security software users, about 133 million of whom are active each month.

The company also has other products, including mobile gaming apps. Of NQ's 98 million mobile gaming users, about 19 million play each month, NQ says.

As China's younger Internet-using population shifts to mobile handsets for gaming -- instead of using desktops -- NQ's going to be competing for users against heavy hitters such asBaidu ( BIDU ), Tencent andQihoo 360 Technology ( QIHU ), another Web security firm.

NQ stock had a tough run last fall, when U.S.-based short-selling firm Muddy Waters published research alleging as much as 72% of NQ's revenue was "fraudulent."

"NQ is a massive fraud," said the research published by the firm, which is run by Carson Block, a well-known short seller. "Our research estimates that NQ's real market share in China is only 1.5%, versus the approximately 55% it reports."

That initial Muddy Waters Research report drove NQ's stock down by more than 47% in a single day, Oct. 24. The stock touched an all-time high of 25.90 on Oct. 21 and lost more than 70% of its value in days, touching 7.58 on Oct. 28.

NQ executives in Dallas and Beijing held a conference call to address the allegations and released details on the amount of cash in company bank accounts.

"We welcome investors and analysts and partners to do due diligence on our business, our products and our strategy," Matt Mathison, NQ's vice president of capital markets, told analysts at the time.

The company also formed a special committee to investigate the allegations made by Muddy Waters. That committee hasn't yet reported its findings.

Progress With Partnerships

NQ stock has since rebounded, at least in part because NQ executives have pushed for new high-profile partnerships, including a deal announced Jan. 15 with U.S. service providerSprint ( S ). Under the partnership, NQ's software will be sold pre-installed on some Sprint smartphones that run Android.

That deal might weigh on NQ's profit margin in coming quarters, but it's seen boosting revenue, according to Canaccord Genuity analyst Michael Walkley. He rates NQ stock a buy with a price target of 29.

"Further, we believe Sprint's agreement to utilize NQ Live across its Android portfolio provides a compelling endorsement of the technology that could help drive additional deals," wrote Walkley, citing the conversation he had with NQ executives at the Mobile World Congress in Barcelona, Spain, in February.

NQ stock ended 2013 at 14.70 and is up about 27% this year (through Tuesday's close), though it hasn't yet broken into new-high territory.

NQ and other Chinese tech companies, including Baidu, Qihoo andNetEase (NTES), have lost ground this week after Chinese customs officials over the weekend reported a drop in the country's February exports. Following a 7% drop Monday, NQ stock closed off about 3% Tuesday at 18.61, on a down day for major stock indexes.

The Sprint deal is one among a spate of partnerships announced in late 2013 and early 2014. Another is with Samsung. Announced Feb. 24, that deal is aimed at enterprise smartphone users. NQ Mobile and Samsung Knox mobile security features have been combined to create "bulletproof mobile device management and security protection," NQ Mobile says.

NQ's 2013 revenue is expected to come in up 109% at $192 million, according to analysts polled by Thomson Reuters. Wall Street sees a 53% climb to $294 million in 2014.

Part of that expected gain is seen coming from the company's mobile gaming business, which "remains strong" with more than half a dozen games launched between December and January, according to Wedge Partners analyst Jun Zhang.

"We expect mobile game revenue will grow over 60% year over year in 2014," Zhang wrote in a February research note.

The Short Interest

Toro Investment Partners, a California-based investment firm that holds a 5% stake in NQ Mobile, sees a strong future in the stock. The investment partnership says the short-selling effort has essentially weeded out a lot of short-term holders.

By Toro's analysis, about 74% of NQ's stock float is with institutional holders that "are not trading their shares, which makes the actively traded float around 8 million."

"With the 74%+ reduction of actively traded float, NQ has quickly become one of the most dangerous stocks to short on the entire NYSE," Toro wrote in a blog post.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: NQ , GOOG , BIDU , QIHU , S

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

111,864,163
  • $3.91 ▲ 2.36%
76,404,746
  • $7.37 ▼ 5.03%
66,680,057
  • $15.25 ▼ 2.12%
61,293,760
  • $30.55 ▼ 6.09%
56,394,825
    $23 unch
55,005,642
  • $95.60 ▼ 2.60%
47,372,853
  • $95.02 ▼ 2.02%
44,783,481
  • $45.19 ▼ 2.40%
As of 7/31/2014, 04:07 PM