NQ Mobile Closes A Game-Changing Deal With America Movil - 200%+ Upside

| About: NQ Mobile (NQ)

NQ Mobile (NYSE:NQ) announced a game-changing partnership with America Movil (NYSE:AMX) on March 3, 2013. America Movil is the third largest wireless carrier in the world, with 262 million subscribers across 18 countries including Mexico, Brazil, and Argentina. America Movil will sell all three of NQ's core mobile products (Mobile Security, Vault and Family Guardian) to its 262 million customers. The deal is a very deep partnership. America Movil will white label NQ's products and sell them through all its marketing channels, including direct-to-consumer marketing such as SMS mailings, online promotions, an outbound call center and pre-load on devices.

Click to enlarge

NQ Mobile is the leading global mobile security and privacy protection SaaS company for smartphones, with over 280M customers worldwide. NQ Mobile's flagship application, NQ Mobile Security, detects and deletes viruses, malicious URLs, and other threats. NQ has 2 other core products; NQ Family Guardian and NQ Vault. NQ Family Guardian is a parental control app that parents install on their kids' smartphones and tablets, which allows parents to monitor their children's location (with geo-fencing) and smartphone usage (restricted web surfing, texting, etc.) and manage how kids use their mobile devices. NQ Mobile Vault for Android and has become a top app on Google Play, with millions of downloads and an average user rating of 4.5 out of 5 stars. The app allows consumers to password protect and encrypt photos and videos on their smartphones.

The America Movil deal is doubly beneficial for NQ. First, it is extremely beneficial from a financial perspective. My estimates for the incremental benefit NQ will realize from the NQ/American Movil deal: 262M customers are being sold 3 NQ products aggressively through all AMX marketing channels. The addressable install market for these customers is 262M X 3 NQ products could be installed per phone= 786M possible phone installs. I am assuming only 236M total installs of the FREE version (way too low). This is only 30%. Should be well over 50% easy given the pre-installs, etc.

Then assume 8% of those free install users pay for the premium paid version (NQ history shows 8%-10%+). Assume $15/year per paid product (less than 50% of US price) and that NQ only gets a 20% revenue share since AMX is doing all the heavy lifting on marketing (revenue share deals typically fall between 1/3 company and 2/3 carrier to 2/3 company to 1/3 carrier, hence a 20% cut to NQ is extremely conservative). Using all of these conservative assumptions results in $57M of nearly 100% margin dollars to NQ...or $1.09/ADR in INCREMENTAL EPS. This is a huge deal for NQ.

The America Movil deal provides a massive second benefit to NQ Mobile. NQ has been trading at ultra-depressed valuation levels due to small cap China names being extremely out of favor. Some shorts have gone as far as to call to NQ Mobile an undifferentiated commodity software company. I have explained in a previous note, why this is inaccurate. Other shorts have pointed to other China frauds and have tried scare tactics to attempt to taint NQ by association. The logic goes…there have been several Chinese companies that have been frauds, so therefore NQ Mobile is likely to be a fraud. Now let's look at the facts. (1) NQ Mobile raised $31M from top-tier VCs including Sequoia and GSR and was deeply vetted by both (2) the company is audited by PWC (the only top 4 not to have a problem with Chinese frauds) (3) NQ went through a proper IPO process (not a reverse merger) and was vetted by 3 US investment banks (Piper, Oppenheimer and Canaccord) (4) NQ registered for a secondary and was vetted by Morgan Stanley and Merrill Lynch in Summer 2012 (5) ex-CTO of Samsung Wireless, Omar Khan, performed EXTENSIVE due diligence (using his extensive contacts in the mobile industry) before joining in Jan 2012 as co-CEO (6) NQ's products have 50,000+ reviews (average rating 4.5 stars) in Google's app store. (7) 2 of NQ's core products won Top 25 awards at CES 2013. In a note from Piper Jaffray (March 4, 2013)…"industry contacts suggest America Movil conducted a deep competitive analysis before selecting NQ Mobile….. We believe the transaction took a long time to come to fruition because of the deep level of technology testing and analysis performed by America Movil." Hence, the America Movil deal should completely address any lingering credibility questions surrounding NQ.

There is a humongous disconnect with the current valuation. NQ Mobile is a SaaS company growing well over 100% generating huge free cash flow. Small cap SaaS comps with MUCH lower growth rates are trading at 30x - 70x 2013 FCF. Given the credibility issue has been largely addressed by the America Movil deal, NQ should trade closer to relevant comps. If NQ were to trade at just 20x - 50x 2013 FCF (30% discount to slower growing SaaS comps), fair value would be $25-$61/ADR. Using an intra-day price of $8.30, that is 200%-640% upside from here. NQ Mobile is likely to deliver outstanding returns to investors.

Disclosure: I am long NQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.