NQ Mobile Looks Ripe For A Turnaround

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 |  About: NQ Mobile Inc. (NQ)
by: Renu Singh

Summary

NQ Mobile has crashed this year, as it is the subject of controversy, but the replacement of its auditor indicates that the long-awaited annual report is on the way.

NQ received a clean chit from an independent committee recently, denying that it has cooked its books.

NQ's fundamentals, along with a solid growth rate suggest that the company could be a good investment.

NQ Mobile (NYSE:NQ) is having a bad time in 2014. The company has been mired in controversy, and its shares are down more than 60% so far this year. NQ Mobile hasn't filed its 2013 annual report yet, which is one of the primary reasons behind its weakness. However, NQ Mobile soared recently after it announced that it is changing its auditor.

As reported by Bloomberg:

"NQ Mobile Inc. rose last week, halting a one-month retreat, after the Chinese mobile-security service provider replaced PricewaterhouseCoopers Zhong Tian LLP with a new auditor to review its 2013 financial statements.

While investors initially worried the change of auditor would fuel short-seller allegations that NQ Mobile has misrepresented financial data, the July 18 announcement triggered buying later in the day on speculation the move will clear the path for the filing of an audited 2013 annual report."

So, the recent spike in NQ shares could be a turning point. On top of that, the allegations around NQ cooking its books are not correct, according to management.

Allegations might be baseless

The Chinese mobile service provider says that it needs more time to complete its annual report. In addition, NQ says that an independent committee has found no evidence of a fraud. As reported by Reuters:

"Chinese mobile security software maker NQ Mobile Inc said an independent committee had found no evidence of fraud, as alleged by short-seller Muddy Waters Research Group.

NQ Mobile's shares rose as much as 34 percent on Wednesday, after the company said the committee also found no evidence that its revenue and cash balances were inconsistent with public disclosures.

A day after Muddy Waters made the allegations, NQ Mobile released details of its bank accounts in mainland China and Hong Kong and also threatened legal action against the short-seller."

If NQ Mobile is right and its critics are wrong, then the stock's recent drop could be a massive opportunity. Let's see why.

Solid prospects

NQ provides mobile internet services, addressing applications such as mobile security, privacy, productivity, personalized cloud, and family protection. Hence, the company can make the most of a fast-growing Chinese internet market. It is looking to address the sizable opportunities in the market by providing innovative products and services, providing entertainment, and creating value for its platform partners and end-users.

Over the past five months, NQ Mobile has entered into more than 10 new major partnerships and business deals with mobile giants and industry leaders. These include the likes of Sprint (NYSE:S), Samsung (OTC:SSNLF), Ubisoft, China Mobile (NYSE:CHL), Huawei, The National Bureau of Statistics in China, and Telkomsel, to name a few.

It has also introduced new products and services to address customers' needs and improve its monetization prospects. NQ Mobile has improved the monetization of its engaged user base. It has increased its annualized revenue run rate from just over $160 million to now over $300 million, with its first-quarter guidance, in just two quarters.

It has a strong mobile user acquisition engine, and apart from just acquiring users, NQ has been expanding its product and service offerings to engage and monetize these users. NQ Mobile is focusing on new technologies to improve mobile discovery and user engagement for both consumers and businesses.

Gaining traction

Recently, NQ Mobile announced some enterprise deals in China. Currently, it has deployed and is supporting more than 700,000 devices at the National Bureau of Statistics in China, and that deal is expected to grow further. According to management, this deal has positioned NQ as the go-to enterprise mobility provider in China. This relationship has led to solid growth in NQ's business development pipeline. In fact, its pipeline has grown from just a couple of hundred thousand devices a couple of quarters ago to now over 1 million devices in the current pipeline.

Going forward, NQ Mobile is rapidly growing its headcount and believes that there are solid growth opportunities ahead. It is focusing aggressively on the healthcare industry, which is expected to become its largest vertical.

NQ Mobile is working with the West China Hospital in Sichuan Province, which is one of the world's largest single-point hospitals, to develop a dedicated mobile health platform. NQ is also working with West China Hospital as a provider of MDM solutions, beating industry giants like IBM Corp. (NYSE:IBM) and Hitachi (OTCPK:HTHIY) for this significant contract. This is a 30,000 device deal and could result in good growth in the future.

NQ Mobile is focusing on a few key strategies to push growth going forward. First, it wants to build credibility and scale in executing against its platform strategy. Second, it is focusing on the commercialization of its R&D investment. Third, it is working to acquire at least one additional tier-one global carrier. Fourth, it is trying to broaden its monetization opportunities. Finally, NQ is looking to drive deeper engagement with its users.

To accomplish its goals, NQ is trying to deliver compelling and engaging products and services. It is also looking to bolster its user acquisition channel and strengthen its ability to distribute products and services directly to end-users, and on behalf of third-party carriers and its manufacturing partners.

Solid growth in key metrics

As a result of such strategies, NQ Mobile's metrics are growing at an impressive pace. The company experienced its largest quarter-over-quarter increase in daily active users, from 127,000 in the third quarter to more than 160,000 at the end of the fourth quarter. It extended important key relationships with the likes of Tencent (OTCPK:TCEHY). It also signed a new strategic deal with Ubisoft. NQ says that it has a strong pipeline of games to be operated over the next few quarters, and aims to bring relevant content to its users and provide a strong platform to mobile content developers.

NQ Mobile's Music Radar application has gained solid traction. It has recorded approximately 20 million downloads since launch, driving more than 7 million unique daily search queries, which is higher than the 6 million that it reported earlier this year. Going forward, NQ expects to exceed 10 million daily search queries later this year, as more partnership announcements from Music Radar are expected in the near future.

Solid fundamentals

NQ Mobile's fundamentals look quite attractive. The stock is very cheap, at a forward P/E ratio of just 4.4. Also, NQ's cash position looks strong at $283 million, covering its debt of $175 million. In addition, NQ's operating cash flow is positive at $24 million for the last twelve months, while a levered free cash flow of $56 million is also impressive. A PEG ratio of just 0.15 indicates that NQ's earnings are expected to grow at a terrific rate going forward.

A look at Yahoo Finance analyst estimates suggests that NQ's earnings are expected to grow impressively going forward, at a terrific annual rate of 40% for the next five years. Hence, NQ looks like a growth stock that could be a solid long-term pick if we ignore the noise and focus on the growth prospects.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.