One would expect that when a company announces that it expects to see revenues increase from $200 million to $500 million in only two years the market would react favorably. Especially when that company has a market cap of less than $400 million and is trading at extremely cheap P/E and forward P/E ratios. However, this was not the case for NQ Mobile (NYSE:NQ). This article published two days ago includes a translated quote from NQ's CEO and Co-founder Yu Lin that confirmed that NQ expects to reach $500 million by 2015. Investors originally heard this expectation earlier in the year, just a few weeks after Muddy Waters' report was released. At that time the stock was trading around $14 and was on its way to rebounding. This time around, the market has shown it is not buying NQ's forecast as can be seen from NQ's price action.
A more significant observation about the company concerns NQ's advertising numbers. A few months ago an article on Seeking Alpha laid out nicely how NQ's reported $36.6 million in advertising revenue for 2013 seems rather high. Based on NQ's Q4 2013 numbers, advertising revenue was 18.6% of total revenue. Given that fact, I was shocked to see that in the recent article it says that, according to Yu Lin, mobile advertising now accounts for close to 50% of revenue. I find it hard to digest that in just a few months since last April, mobile advertising has gone from 18% of total to now close to 50%. Let's take a look at some numbers: analysts expect $326 million in revenue for 2014, according to Yahoo, which would mean full-year advertising revenue would be somewhere in the area of $130 million (40% of revenue) to $163 million (50% of revenue). To be fair, NQ said advertising revenue increased over 300% YoY (312% to be exact) in 2013. But in order for their current advertising revenue to make up 50% of their total revenue, it would mean that NQ would have to increase advertising by roughly 300% again, something that I would argue is very unrealistic.
Yu Lin went on to discuss how advertising is expected to be one the company's main growth areas and while I don't disagree with that strategy, I find it hard to accept that the company could see its advertising revenue jump 300% in consecutive years, and that in just under five months, advertising could jump from 18% of total revenue to close to 50%.
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