After last week's collapse on NQ Mobile (NQ) led by Muddy Waters' scathing report, investors were left shell-shocked as before 90 minutes were up more than $500 million in market cap had been wiped out and the stock had been halted for the day.
Words like "Fraud", "corrupt", "spyware", and "zero" were bandied about in the 81 page report that appears to weave a pretty convincing case at first glance. Certainly Carson Block's historical track record is impressive enough. Having had several securities upon which coverage was issued eventually be delisted, Carson rides the coattails of his notoriety built upon these scandals, most notably, Sino Forest.
While John Paulson, then largest shareholder lost a pretty penny on paper, Carson block made out like a bandit and added a gold star of credibility to his belt, a notch he would later cash in on similar attempts to raid Focus Media Holdings (FMCN) and Spreadtrum (SPRD). While both stocks certainly experienced temporary haircuts in the vicinity of 60% and 40% respectively upon Muddy Waters' research and comments, both ended up recovering rather dramatically in the next two weeks, simply because the underlying fundamentals behind the arguments made were flawed, as appears to be the case with NQ Mobile.
"NQ's cash balances are highly likely to not be real"... "We therefore believe the term deposits are likely forgeries." On the severity scale of claims and accusations this one sits atop that food chain, and you would think there would be a lot of very credible due diligence, double and triple checking before you dip your toe in those waters. But it seems Muddy Waters felt comfortable enough. With the help of a few bucket shop techies for hire screenshotting mounds of source code, back of the envelope guesses about revenue and some outlandish claims, Muddy Waters was ready to label this a "zero" and cash in that gold star once again for a hefty payday. Notwithstanding of course their inability to locate Yitadong's (highly documented) main office in Beijing.
While I surely believe Carson Block is a good Samaritan at heart, a modern day hero doing us the good deeds of helping us avoid losing money investing in those not so great companies... it's also hard to turn a blind eye to the extremely elevated put open interest & volume in the days leading up to such a momentous research piece. It likely is a matter of time until an ambitious reporter digs up evidence of the Tens of millions of dollars being made by frontloading these research pieces both by Muddy Waters and those it associates with.
In the last few days the company has forcefully rebutted nearly all of Carson Block's main talking points. This includes resorting to releasing crucial and confidential business data and detailed bank account information and have also made a move to transfer USD $100m to Standard Chartered Bank for further validation and independent verification to calm investors (I would also note this and the co's recent filings with the SEC likely take the concern of a CCME-style halt off the table). At the expense of losing interest gains on these terms deposits the company is showing that it can take the necessary steps to restore investor confidence and that the hysteria Muddy Waters attempted to induce over the company's cash being 100% in level 2 assets was misdirection and a lack of understanding of the differences between the mechanics of the US & China systems. Unlike the US, in China L2 assets can be readily converted to cash in a day's time.
While other concerns raised by Muddy Waters seem valid enough and tempt me to address them point by point, many have already been addressed in length by other Seeking Alpha contributors such as this one "How easy is it to create a scandal?" touching upon NQ's Antivirus 7.0 actually being safe the CCTV malware scandal, and others.
In fact, NQ Mobile this morning released an exhaustive 97 Page rebuttal addressing every false claim made by Muddy Waters and highlights the biased and selective work the research piece they put out represents. You can find the comprehensive rebuttal here on the company's website.
To be fair, Muddy Waters has done a good job of raising important questions, but for now, the facts stand with NQ mobile, and any charges of outright fraud, forgery, and smoke and mirrors have been adamantly addressed.
As it currently stands, NQ mobile according to Yahoo has a 33.51M float, of which 12.53M shares or 37.4% are short as of Oct 15, 2013. Following the record volume the stock has had in the last 3 sessions given the news flow I believe it would be conservative to expect that figure to have increased from 37.4% to over 50%.
Given NQ Mobile's comprehensive push to address every concern outlined by Muddy Waters' report in detail, the stock still being 50% lower than it was prior to the report, as well as using FMCN and SPRD as a backdrop for what to expect it seems clear a Large short squeeze is on the horizon.
Let's step into our common sense corner here, Millions upon millions of shares were shorted and tens of thousands of puts purchased on the basis of this 81 page report of which not ONE major claim has been substantiated, and more so, have been undeniably rebutted!Keep in mind, the precedent here is within two weeks of the drop the stock had completely recovered the entire drop, not to mention continued higher thereafter, an outcome which I would expect repeats here.
At $11 this still represents a significantly undervalued high growth company with a forward PE of 7, and if you adjust those figures for the allocated buyback of $35M (I would note the company has hinted at looking to increase this figure as a result of recent events) which can begin after their earnings are released within two weeks, these figures look even more attractive.
When you make a livelihood by attempting to destroy companies and wipe out shareholders for your monetary gain, as much as your motives should be questioned, your research should be more so. Painting a clever but incomplete picture raises many ethical concerns and represents a disappointing decline in the quality of Muddy Waters' research following the long gone days of Sino Forest.
Additional disclosure: I may decide to purchase or sell shares in the next 72 hours.