The Sprint Deal Is Just Another Reason to Love NQ Mobile

NQ Mobile (NYSE: NQ  ) jumped over 10% when it was announced that Sprint will provide a version of its NQ Live security software to Sprint Nextel's (NYSE: S  ) Android smartphones.

NQ's anti-virus software has long enjoyed good reviews, and NQ Live, released late last year, takes the platform in a new direction as an always-on malware preventer and privacy suite. Making this part of the default package for Sprint's Android users is a huge vote of confidence in the new software, and dramatically increases NQ's profile in the United States.

The jump on the announcement, and the relative lack of movement for the rest of the week, may have some believing this is a one-off boost that's already been baked into the price of the stock. Yet, a close look at the company's financials suggest there is significant room to run, and offers some compelling reasons to believe that the stock may rally further in the weeks to come.

Backstory on NQ
The elephant in the room, of course, is the late-October Muddy Waters fiasco, in which the short-selling research firm tapped the company as a virtual fraud whose cash-on-hand and paying user base both likely did not exist. The allegations chopped the price over 60%, from a peak near $25 to below $9.

The claims sparked a panic, but within a matter of days, NQ had refuted the worst of the allegations with independent verification of a significant cash deposit and user base. The stock recovered, but fears lingered and it hasn't since approached its 52-week high.

Analysts covering the stock since then have put in a very narrow range for fiscal 2014 earnings: $1.34-$1.50 per share, with the average being $1.41. These estimates came before the Sprint announcement, and while it is unclear how immediately that deal will start having additional effects on the bottom line, even the $1.41 is a P/E of 10.75.

That's an impressive bargain for a company that has been growing revenue strongly year-over-year, and the Sprint deal underscores that growth continuing.

Mobile security is a growth industry, too, and with companies like Deutsche Telekom investing in high-priced "secure smartphones," NQ is well-positioned to provide a more affordable alternative for the average user concerned about privacy. Not everyone can afford a several-thousand-dollar Fort Knox of a phone, but value-added pack-ins that Sprint is giving, like NQ Live, could drive some sales for consumers who want extra security. 

Sprint, not so much
While the news impacts positively on Sprint as well, the partnership with NQ is not enough to make it seem like a good buy at these levels. Sprint's financials are terrifying, with market cap, total debt, and annual revenue all floating around $35 billion, a trivial 1.2% operating margin and a negative return on equity.

Teaming up with NQ might attract some new customers to Sprint, and focusing on security is almost certainly the right move for any major telecom, but Sprint's chronic lack of profitability requires more than this shot in the arm. Even if Sprint has been spared the NSA surveillance fallout that companies like Verizon and AT&T have experienced, there is no sign of a mass exodus from those companies, and Sprint's road to capitalizing on this opportunity is a long and winding one indeed.

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