Why I Still Can't Get Behind NQ Mobile Inc.

NQ Mobile is either terribly undervalued or a complete fraud. Here's why one Fool isn't willing to take that gamble.

Jun 12, 2014 at 3:05PM

Look, I get it. Trading under five times next year's expected earnings, shares of NQ Mobile (NYSE:NQ) look ridiculously cheap right now. But I'm still not biting.

Sure, NQ stock roared 34% higher in a single day last week, after the Chinese Internet services company stated its special committee's independent investigation yielded no evidence of fraud. At first glance -- and contrary to my previous assertion its battle was far from over -- it appeared NQ Mobile had cleared its name in the face of extensive fraud allegations brought by noted short seller Muddy Waters.

Investors are waiting on two key items
So why, then, have shares of NQ Mobile steadily given up most of those gains over the past week? Look no further than the fact NQ still hasn't received an unqualified audit, or filed its twice-delayed annual report on form 20-F as required by the SEC. Until investors see both of these things happen, the stock is likely to remain under pressure.

And that's not to mention the fact NQ's own report admitted the investigation team "observed indications that some information might be missing," and this on "many devices" it collected from senior management and from professionals "related to the company's activities as referred to in the Muddy Waters allegations."

Carson Block of Muddy Waters unsurprisingly pounced on this point, stating, "Given that there was data tampering during an investigation that dragged on far longer than should have been allowed, it is clear that management was able to stay a step ahead of the investigation by changing and deleting data."

What's more, Block speculates the admission in NQ's report was "undoubtedly the result of a negotiation between the advisors and the company, and [...] almost certainly understates the severity of the problem."

And I agree: If NQ truly wants to be transparent, it needs to release the full report so we know the extent of its data tampering.

Why the divestments?
Keeping in mind NQ Mobile ended 2013 with a total cash position of $283 million, I also find myself unconvinced by the timing and need for NQ to sell small stakes in its subsidiaries.

Roughly two weeks ago, NQ Mobile announced it would sell up to 5.88% of its wholly owned gaming subsidiary FL Mobile for $25 million -- $15 million from China-based Bison Capital and $10 million from "other investors." That valued FL Mobile at approximately $425 million.

Then, earlier this week, NQ agreed to sell 3.4% of NationSky for $18 million to Beijing Guorun Qilian Venture Capital Center, which gives the subsidiary alone at $530 million valuation. NQ also states it will sell another 2.3% of NationSky for $12 million to "other investors within the next two months," and plans to use the funds for research and development, marketing, working capital activities and the expansion of NationSky's core operations."

The kicker? NQ goes on to tease the investors have the right to "demand the redemption of their shares" if NationSky doesn't complete a qualified IPO or find a third-party buyer for a valuation of at least $550 million within 24 months. A similar caveat went for its FL Mobile announcement, which comes with a redemption right if FL Mobile doesn't complete an IPO within 12 months.

And that's all well and good, especially considering the combined post-money valuations of FL Mobile and NationSky are said to be $955 million, or more than twice NQ Mobile's entire market cap of $465 million as of this writing.

But here's my question: Why in the world would these hedge funds want to purchase small stakes in NQ Mobile's subsidiaries at these valuations, when they could instead simply buy NQ's own massively undervalued common stock? Or perhaps NQ is just that convincing, and maybe the deals were struck more to highlight the underlying value of NQ Mobile's combined businesses to investors.

Foolish takeaway
In the end, though, there are just too many red flags that continue to crop up, and something just doesn't smell right to me. That's not to say NQ Mobile couldn't fully exonerate itself going forward, in which case its loyal investor base would be handsomely rewarded. But if this unravels and NQ is eventually exposed as a fraud, the risk is a total loss. Call me crazy, but that's a risk I'm not willing to make.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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