What's Behind NQ Mobile's Flash Crash?

NQ Mobile  (NYSE: NQ  ) had a wild trading day on Friday, and that might have been just the beginning. The stock was halted after losing 20% of its value in 10 minutes without any apparent news during Friday's afternoon session. This week may be even more volatile as the company presents at an investment conference and reports earnings for the quarter ended in December. Recent catalysts have offered investors signs of hope, as agreements with Samsung  (NASDAQOTH: SSNLF  ) and Sprint  (NYSE: S  )  have helped NQ regain most of its lost market value.

It's difficult to be in the middle of the road with an opinion on this company. Either you think its dramatically undervalued, or you think its committing fraud and will fall to zero. Which side of the fence are you on?

Flash crash
On Friday afternoon at 2:45PM, shares of NQ came under pressure and at 3:00PM lost their bid altogether. From peak to trough, the company traded from $21.85 down to $17.13 and was stopped after losing 16% of its market value in three minutes. The stock traded back up to close at $19.42, off its lows, but still down 8% and leaving investors wondering what happened. After finding no definitive reason for the cause of the mini flash crash, a rumor was started that a short-selling firm called Muddy Waters was about to publish a follow-on research report to its initial strong sell recommendation from October 2013.

Recent catalysts
NQ has had two recent catalysts that put upward pressure on the share price and helped it regain most of its lost value since Muddy Water's initial sell recommendation. On Jan. 15, NQ announced a deal where it would power Sprint Live, which is essentially a wallpaper replacement for all of Sprint's Android phones. Sprint is expected to begin shipping phones with NQ integrated later in 2014.

Following this announcement, on Feb. 24, NQ announced a deal where it would resell Samsung's KNOX mobile device security solution. This could potentially be a much larger opportunity than the deal with Sprint because of Samsung's presence in Asia. While these two companies are great partners, since no deal terms were discussed, it is unclear if NQ will be receiving any up-front revenue from these agreements.

Something to talk about
The timing of the rumor about a follow-on short report is interesting because NQ will be meeting with investors at a Morgan Stanley conference the following trading day, March 3, and presenting to an audience after the market close. Since publishing its initial "strong sell" rating, Muddy Waters has issued five follow-on reports, so a sixth (timed to coincide with a conference presentation) is a possibility. It's unlikely that the short-seller would get access to management during the conference, so this could be a way to get investors to ask questions that management may find difficult to answer. The stock move is a dramatic reaction to a short-seller's opinion, though, so you have to wonder, how clear is Muddy Waters' vision?

Mixed track record
Muddy Waters had some great success several years ago, but its recent calls have been less profitable. Working off of reports on the Muddy Waters website, the five calls that the firm made between June 2010 and June 2011 all resulted in dramatic and sustained share price drops. Sustainability is important here because this indicates a broken business, rather than a temporary stumble. Accounting irregularities can be remedied, but business fraud cannot. After the first five stock calls, the next four, from November of 2011 to July 2013 have gone up in price from the date of Muddy Waters' initiations.

Muddy Water's Sell Recommendation Performance

 

ONP

RINO

CCME

DGW

SNOFF

FMCN

EDU

OLMIY

Initiation Date

6/28/10

11/10/10

2/03/11

4/04/11

6/02/11

11/21/11

7/18/12

11/26/12

Pre Init Price

8.43

15.52

16.61

5.49

18.64

25.5

22.26

25.59

Last Trade Price

2.42

0.02

0.02

0.25

0

27.42

27.84

27.35

This could be a volatile week
In summary, there has been a lot of talk on both sides. Muddy Waters claims that the bulk of NQ's revenue is to related parties that don't really exist, and NQ is leading investors to expect revenue from the Sprint and Samsung agreements. Clarity will come in time, and with the upcoming conference presentation and earnings announcement, clarity may come sooner than later. Analysts expect $1.41 for earnings in the coming year, leading to a forward P/E of 14. The company is extremely cheap for a growth stock, and if Muddy Waters is proven wrong, the stock could have a dramatic move to the upside.

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  • Report this Comment On March 04, 2014, at 12:33 PM, chivalry66866 wrote:

    C'mon you know exactly what happened. Don't tell me that market makers and HFTs cannot coordinate one last short attack. It is that simple. Last chance to cover. Wonder if Carson covered??? Of course he did........

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