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NQ's Earnings Matter Less Than the Auditor Report

By David Eller – Mar 13, 2014 at 1:05PM

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NQ is one of the most controversial technology companies since the Muddy Waters short report. We may be close to the resolution.

NQ Mobile's (NYSE: NQ) earnings report will be closely watched when it is released on March 13. The first line of the Muddy Waters report, which resulted in the loss of 76% of the company's market cap, stated that 72% of NQ's revenue was fictitious. These numbers show two things: A short seller, who has had success in the past, thinks the company is almost a complete fraud, and a lot of people believed him. Many people will be looking closely at the earnings report for signs of confirmation one way or the other.

Results look good, if they are real
NQ's year-over-year revenue growth has been over 100% in each of the last four quarters, but if the revenue is fraudulent, the numbers are meaningless. They do have to close the books some time, and we may be coming to a resolution. On the third-quarter earnings call, the company stated that it hired Deloitte and Touche to act as a special investigator into the matter. With the closing of the books, the company can use this platform to discuss the results. It's unlikely that Deloitte would risk its reputation, and confirmation of the absence of fraud should be provided by the time the 20-F is filed, if not on the call.

If you see smoke, is there fire?
The level of detail in the Muddy Waters report is troubling. The 81 page report, filled with claims based on investigative field research, made a lot of damning statements, but none have been substantiated.

Don't read too much into the Morgan and BOA investments
Since the end of the year, NQ shares have recovered most of their gains as investors, Morgan Stanley and Bank of America have taken large positions in the company and deals were signed with Sprint and Samsung. However, the typical "smart money" technology hedge funds are missing from the top holders list. Do hedge fund managers know something we don't, or are they just waiting on the sidelines until there is a clean auditor's report?

Somebody (other than you) needs to risk something
What is missing, now, is a third-party vote of confidence. Morgan Stanley and Bank of America could have been supporting the stock to sell out of it quietly, before earnings. There is no mention of a revenue commitment between Sprint or Samsung and NQ, so these could just be more fluff than substance, with the opportunity for NQ to convert customers on the back end. Somebody reputable needs to step in and take on some of this risk. Like Warren Buffett risking his capital by making an investment in Goldman Sachs in September of 2008, an auditor needs to risk its reputation with a clean report.

David Eller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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