Why Montage Technology Group Ltd. Shares Dropped

Is Montage Technology's plunge meaningful? Or just another movement?

Feb 7, 2014 at 8:08PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our thesis.

What: Shares of Montage Technology Group, Ltd. (NASDAQ:MONT) fell 10% Friday after short-selling firm Gravity Research issued a report accusing the fabless semiconductor company of fraud.

So what: In the 27-page report issued Thursday afternoon, Gravity Research insists it believes Montage is "grossly overstating its revenue," citing "overwhelming evidence" that its largest distributor is a shell company established by a senior Montage employee to help fabricate Montage's financial results.

The accusation comes less than a month after Montage provided encouraging preliminary fourth-quarter results, which caused the stock to jump more than 15% in a single day.

Now what: Montage issued a statement in response today, saying it believes the accusations are without merit and contain "numerous errors of fact, misleading speculation, and misinterpretation of events." What's more, Montage promised it will release additional information "in due course" to refute Gravity's allegations.

Given the potential negative repercussions if Gravity's allegations aren't proven false, I'd prefer to stay on the sidelines until Montage releases that information. On that note, I'll admit it's mildly alarming Montage hasn't already released at least some specifics regarding which details Gravity got wrong -- especially considering Montage just announced pricing of a follow-on public offering of more than 5.3 million new shares last week.

If the company truly has nothing to hide, it should have no problems swiftly refuting the report.

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