Introduction
Rewind back just a few months and the sentiment was overwhelmingly bullish. Granted, there were some loud bears, but even the bearish articles written on various mediums were flooded with bullish comments pointing out the flaws. Now that the stock is doing badly, many mediums are overwhelmingly filled with bears. Can we take a minute and forget about this bull / bear (fraud) debate and just conduct a logical analysis of the company viewing both sides on a fundamental level? I don't think anyone here at SHU thinks that the Muddy Waters report has any merit and Carson Block himself has already admitted to covering his short and believes the audit will come back clean. The majority of shorts seem to believe that the audit will come back negative and I completely disagree, but I am not here to argue this in any way. At this stage in the ball game, everyone in it has already seen all the evidence and made their decision. The issue I am seeing is that so many people have been split into a psuedo political party / religion type system where they have made their decision and refuse to hear out the other side at all. So I thought that I would write a quick overview analysis of the company and I genuinely hope that everyone looks at it logically and does not ignore something you may not like simply because you not a part of that particular "long" or "short" political party.
Products
NQ Mobile has absolutely fantastic products. As some of you know, I reverse engineered their NQ Mobile Security application to verify the malicious allegations, and was pleasently surprised at how elegantly it was written and, of course, there was nothing malicious about it. Most of you think that their security application is their big hit, but according to Google Play's Top Grossing Android Applications NQ Vault is actually just about 15 rank points under WhatsApp for top grossing applications. Furthermore, according to App Annie NQ Vault is the #1 grossing business application on Android. Their products are growing at a massive rate and they are continuously adding new products into their pipeline. This is not even including the massive number of NQ Live installations they have already provided before it is even publicly available, via their various business partnerships with companies like Sprint.
Business
Now, on a business growth level, NQ Mobile is exceptional. Not only are their products phenomonal, as explained above, but they are consistently expanding their platform and growing at a very quick rate. They have created partnerships with giants such as Samsung, Sprint, China Mobile, and Ingram Micro, and they're taking very quick and decisive action to ensure their market control globally. They are consistently entering strategic alliances with mobile providers in developing countries as well which is an incredibly smart move considering how quickly mobile is growing worldwide. For those that don't know, there are actually more people with access to a mobile phone in the world than there are with access to indoor plumbing, and that's a fact. Believe it or not, 6 out of the 7 billion people on the planet already have access to a mobile phone, and that number is astonishingly still growing. NQ Mobile seems to understand this and are capitalizing on expanding their market share and product line in places many other companies are ignoring.
Finances
This is such a love hate relationship for me. They are growing revenues at an astonishing rate and I actually expect revenue to continue growing at a fairly similar rate for at least the next 5 years, but they are also spending money in very inefficient ways. Two major examples of this are their high valuations on their acquisitions and their share based compensation (SBC). They currently have cash of $283.0 million ($179.7 million in cash and cash equivalents and $103.3 million in term deposits) which is more than enough to continue operations at the same pace they have been, but they are also beginning to lose more cash given how they are spending money. Assuming NQ Mobile continues to decrease margins, spend so much revenue on SBC, and make unbelievably overvalued acquisitions, this cash will quickly evaporate.
Management
I think management is absolutely phenomonal at product development, but I also think they're quite terrible at many key aspects of running a business. A major problem is that they are consistently spending money in ways that benefit no shareholder, such as the high SBC. They spent an astonishing 28.6% of annual revenue on paying management in 2013, compared with the 5.6% Google spent or the less than 1% Baidu spent. You can see an image of the average SBC revenue percentage in various industries by clicking this link. As you can clearly see, NQ Mobile is not only an anomoly in regards to SBC revenue percentage, but they are absolutely astronomical in comparison to the average levels. They have also continued to make acquisitions with valuations that are beyond ridiculous, with their most recent being vLife, without elaborating on why they have spent so much. The company vLife has a few hundred thousand downloads at the most, calculated by analyzing Google Play and various Chinese app stores, and is a free application, yet NQ Mobile applied well over a $100 million valuation to them. This is ignoring the fact that they spent $45.5 million in stock while it was valued at $11.66. This means that if NQ Mobile reached pre Muddy Waters levels of $25.90 then they would have paid $101,010,000 in stock alone, not to mention the $34.4 million they paid in cash, and that's only for 58% of the company. Management also continuously relies on hype, but also continuously waits until the last minute to deliver. Their FQ4 results were delayed by months, did not contain audit results, and were not strong in earnings, although they did beat revenue. They have also now waited until the very last day before the 20-F even after assuring everyone it would be released on time, cutting it very close, and who knows if they will apply for an extension.
Conclusion
The products are fantastic, management is made up of very smart product people, they are expanding both their product line and their global market share, partnerships with mobile giants are growing every month, and they are continuously executing their plans with efficiency. Everything looks good when you look at it that way - a massively growing company in a massively growing industry with ever growing market share at a low (forward) valuation. The problem is that they are terrible at growing EPS, terrible at meeting share holder deadlines, and terrible at instilling confidence in investors. Assuming they had the same SBC as Google, which is actually above average, they should have put out an EPS of $1.31 for 2013, instead of a loss of -$0.05, which would give a trailing P/E of 10 and a much brighter outlook. Pile that on to more fair valuations of their acquisitions and their cash would be significantly higher as well. My opinion is that Omar Khan and Dr. Henry Lin should be replaced as CEO and put as heads of product development, a single CEO that can better manage a public company in shareholders interest should be brought on board, a single head of global expansion should be brought on board, and their board of directors should be replaced and nominated / voted in by the share holders. All SBC and other major financial decisions should be voted on by a non partisan board with no affiliation with management and salaries should be capped at fair values and adjusted based on company performance. Given these changes, NQ Mobile would easily be a $40 stock by the end of the year and far higher in the years to follow.