NQ Mobile Short Sellers Have a Point

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Whether you're an NQ Mobile (NYSE: NQ  ) bull or bear, and whether you think that the company is legitimate or not, at the end of the day it's important to approach the stock from a calm, rational point of view. While it's always fun to hope for a "short squeeze" in a stock where half of the float is shorted, it's tough to ignore that the short sellers may have some really credible arguments here.

Management is too promotional
One of the first red flags that investors should notice is just how promotional the management team is. Now, there's nothing wrong with wanting to get investors excited about your stock, but there's a difference between getting the story out and extreme exaggeration. For instance, NQ's Omar Khan has been quoted as saying, "We are building the company for the next 100 years".

Okay, that's wonderful, but just how many companies have a 100 year history, particularly in technology? Sure, one could point to IBM (NYSE: IBM  ) , which has been around since 1911, but throughout those 100 years the technology landscape has seen paradigm shift after paradigm shift, and IBM has had to dramatically change its business model over that time. Did any of IBM's original employees know what the company would look like or be doing today? No!

So, what right does NQ have to claim that it's building the business for the next 100 years when they have absolutely no idea what the tech landscape will look like in 100 years? This type of overly-promotional management certainly serves as a red flag for investors in a long-term story. Yes, management should be confident in their work and their vision, but without a dose of humility and realism; it's hard to trust management to be the best stewards of investors' hard-earned capital.

The growth expectations are extreme
There are plenty of high-growth names in the world of small cap tech – and those are the kinds of stories that make people serious money if identified early enough. Unfortunately, the expectations surrounding NQ Mobile are actually quite extreme. For instance, the company is expected to deliver 108% growth on a year-over-year basis in 2013. Fair enough – doubling revenues from a $92 million base isn't the hardest thing to do.

What should give investors a case of serious heartburn is that the four analysts covering the stock are expecting NQ to really knock it out of the park next year. In particular, the sell-side expects revenues growing a whopping 53.4% from $191 million to $293 million. Now, these expectations are in place largely because management has been hyping its "1-2-5" plan in which they expect $200 million in revenue by the end of 2013 and $500 million in revenue by the end of 2015.

Management also had the audacity to launch its "2-5-10" plan in which it hopes to have $1 billion by 2017. While the company may actually hit these goals, it's pretty silly to be promoting these types of "slogans." After all, NQ can "aim" for whatever they want in terms of revenue/profits, but will they deliver? Only time will tell, but if NQ doesn't, the shareholders are going to suffer for it.

Foolish bottom line
NQ Mobile just doesn't look like a company that investors should trust their hard earned money in. There's a reason that 50% of the float is sold short and, frankly, even if there is no fraud here (as Carson Block from Muddy Waters Research claims), management seems to be setting up extremely unrealistic expectations that, frankly, the market is no longer buying. Stay out of this stock – there are many better places to put your investment dollars. 

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2013, at 12:16 PM, Kshen wrote:

    The growth expectations are extreme

    How do you explain the 8 quarter rally in exceeding expectation? Is 50% on 190M that extreme? In a growing market of cellphone users? they are expanding enormously worldwide and mainly through the emerging market countries such as brazil, india and singapore...

    you are also clearly biased on what is motivational and what is not. Especially since their pumping of the stock has no immediate benefit since they are under mandatory share lock. Providing an analogy or a strong goal is apparently a crime now.

  • Report this Comment On December 19, 2013, at 12:31 PM, Sintra61 wrote:

    Well just have to say this to you about the 100 years to me it is childish (or again maybe be malicious) from you thinking that Omar Khan truly meant 100 years , to me is a figurative way to say that NQ will be here for a long time and not 100 years the way you want us to understand

    Omar Khan is a intelligent man a graduate from MIT and am sure he meant just what I said, why you guy's picking on everything and anything about this company? I start to think is because they Chinese !

  • Report this Comment On December 19, 2013, at 12:49 PM, mjbmd58 wrote:

    I am an original fool, ever since the first book by the brothers Gardner and have been so for the long haul.

    I have read a thousand if I have read one article. This is the least well reasoned, thought out or rational article I have come across on what is generally a respected investing site. I am long NQ. But to use the 3 theses postulated to not invest are ludicrous.

    1. Over promoting is not to be confused with meeting face to face with analysts and investors to address the direct and outrageous claims made by Black. Answering them as Khan et al have is the only way to keep perspective until the audit speaks either good or bad. To suggest this is hype is not knowing the context.

    2. building a company for 100 years should be the goal of any serious businessman or woman. Do you think Tom and and David Gardner did not want to grow a strong and lasting brand? By the way, IBM or CTR as it was originally named did in fact want to change the landscape. They did it by starting strong and evolving to make the next great machine to computer to consulting. They grew and became a world leader not by envisioning themselves a small soon to be forgotten company.

    3. Growth too fast. I believe you know nothing about this company and have no idea about its current and future plans. If the corporate team is even partially correct, they will easily meet projected revenue growth. But if they don't then we investors will appropriately take it on the chin. That is the essence of investing.

    I am very disappointed in this article. Investors should expect 'foolish' advice as we look to it for such. We do not look for what appears to be the biased, poorly researched and even worse reported story herein.

  • Report this Comment On December 19, 2013, at 2:03 PM, zanajohn1 wrote:

    One of the perhaps overlooked values in NQ's mobile security offerings that US firms can't offer is that they are not subject to US court orders demanding access to their protected communications.

  • Report this Comment On December 19, 2013, at 5:50 PM, natehiggers wrote:

    I understand and respect your points. However, I disagree with the obstinate confidence with which you deliver them. You are not inside the company; you have not been made aware of the nuances of the situation. It is careless of you to present arguments on a topic that you do not understand. Frankly, your grammar and sentence structure lack sophistication beyond a sophomoric level, as well, frankly, is my opinion.

    Additionally, your only two points of contention to the stock are purely surface level observations that have no basis in the fundamental impetuses for this company. Sure, ~50% of the float is shorted. And yes, management has high expectations for the upcoming years. However, you must look at why each of these is even a thing.

    The float is so heavily shorted due to an overriding sense of skepticism surrounding the company, as generated by Block and residual short sellers. The stock has shown strong support and resistance at the $11 and $14 price points, respectively. The dips and rebounds are purely consequences of technical trades. At this point, longs and shorts are fairly matched, anticipating the audit report release and Q4 earnings report. The heavy short volume does not provide insight into the company's legitimacy, but merely indicates the degree of juxtaposition between bettors, long and short alike. There are finer details surrounding smart money traders going head to head, swinging the stock 2-5% a day, but I think my point is well served by the above information. And that is, do not make such bold assumptions on such weak indicators.

    Management's expectations are high due to strong Q3 results, which beat the Street's estimates, impending deals in the pipeline, and ever expanding product offerings. Their upcoming deal structure, such as pairing with China Mobile, is promising enough to warrant bullish sentiment, at least from management. Once again, a more in depth understanding of the action actually surrounding the company would substantiate your claims and give meaning to the information you provided.

    **I have no position in NQ.

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