The 52 week range of $7.05 – $25.90 is wide and it has made a two large fluctuations within that range. The stock sold off significantly over the past month, from slightly over $20, down to its current price of $12.60 behind concerns on its business model, delayed earnings and an accounting investigation. It has bounced a bit from around $11 to $12.60 following its earnings report. The shares could be oversold and ready for a further bounce or this could just be a temporary recovery in a longer path downwards for the share price. A positive independent review of the business and solid 1Q results could act as positive catalysts for the shares. The company supported its stock price this week by buying back shares and called the selloff “Ridiculous”.
NQ Mobile is a Play on China Smartphone Adoption
NQ Mobile is a global provider of mobile internet services engaged in security, privacy and productivity solutions. It is the leading provider of mobile internet security in the China and is headquartered in Beijing, China. Consumer mobile security focuses on protecting users from malware, data theft and privacy intrusion. Mobile games and advertising provides a range of services including mobility strategy consulting, architecture design, hardware, software procurement and application management. Enterprise mobility provides similar services to large organizations.
Delayed Earnings Report was Mixed
The 4Q13 report was mixed in its indications. User growth metrics slowed and margins declined but the cost of sales jumped in a big way. That means it’s possibly costing a lot more to get incremental users onboard. The company also made another acquisition in quarter that was expensive and left analysts scratching their heads. These issues added to concern from those making the short case like Carson Block from Muddy Waters. He has called the company fraudulent and stated it was worthless in October of last year.
All this said, NQ Mobile’s sales were above consensus estimates and the company’s guidance. In 4Q13, q/q user growth increased by about 12%, slightly below the 14% growth rates in two prior quarters. Also, monthly active users increased just 3%, versus levels around 10% – 11% in 2Q and 3Q. Revenue was up by 25% but costs jumped by 58%. Slowing growth rates and less active users is a concern for a company at this point.
The higher costs could pay off in future periods through revenue growth and an increased user base. However, it could also be the start of a trend of lower margins. This at least played some role with some mix shift in the period to lower margin business. In the quarter, hardware sales to enterprise customers accounted for a larger percentage and was responsible for the negative mix shift.
Guidance for 1Q14 was actually above consensus at $75 – $76 million. Management also raised FY14 guidance to $320 – $325 million from $305 – $310 million. The increased sales guidance is from the lower margin enterprise business so there will continue to be at least some headwinds from that on 2014 margins.
Sell-side analysts have positive ratings on the stock and tried to put a positive spin on a so-so quarter. FY14 earnings estimates declined to $1.24 per share from $1.41 30 days ago after the report. The spin that the lower margins was due to higher than expected sales from the hardware business does not account for all of the EPS cuts. The models also had to forecast lower sales from its other businesses. If hardware was purely incremental, EPS would have went up from higher sales but margins down. Costs are increasing and that is a concern.
NQ Mobile looks Cheap
Based on current estimates, the shares trade at 10.2x FY14 EPS. That is relatively low for a potentially high-growth, early phase technology firm. The valuation indicates some believe its business model may have issues, that it will not meet those growth rates or that there is something else going on here. The company currently is undergoing an external audit by Deloitte & Touche and results should be out by the end of the month. A good 20-F filing could go a long way to easing concerns on the shares and would likely lead a positive bounce in the shares.
In order to buy the stock, investors should do their homework like any other investment. While we looked at the quarter, competition is key to understand. The company is a great way to play the increasing penetration of smartphones in China. The potential problems are users adopting other services that replace it and that the business does have accounting issues. There were some warning signs in the most recent quarter, but nothing definitive. Investors that do their homework, could see a big payoff on NQ Mobile.
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John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.