NQ Mobile: A Golden Opportunity For Value Investors

| About: Link Motion (LKM)


Why I'm interested in NQ stock.

From a cash point of view, NQ is significantly undervalued.

My 52-week target prices for NQ for bear case, neutral case and bull case.

As I mentioned in my profile, I'm a true believer in value investing and believe that value investing will prevail over all other investment strategies in the long run. This is my first Seeking Alpha article, so I'll cover a stock I consider to be the most undervalued stock around.

I began following NQ Mobile (NQ) much earlier than its IPO date since I had been working in the mobile internet field for many years. As a professional in that area, I could not have possibly missed out on NQ Mobile: It was the number one mobile security company in China as far back as 2011. In addition, it was the first mobile security company ever to have an IPO in the United States.

After the stock market turmoil in 2013 and 2014, NQ's stock price has been running within the narrow range of $3~5 for about 18 months, except briefly around June 2015. For the last two months, NQ's stock price shows signs of momentum as its divestment of its subsidiary company FL Mobile progresses.

However, as rumors that CSRC (China Stock Regulatory Commission) would ban M&A in four business categories: fintech, video games, VR, film/TV circled around, the price of NQ stock was hit hard. This is because two of the main areas of focus for FL Mobile's business are video game publishing and mobile advertisement. This unconfirmed rumor caused an approximate 30% stock price hit, from 5.30 to 4.01 for NQ stock in just one week.

As many NQ longs are suffering from this recent 30% loss, this is a golden opportunity for value investors to step in, because:

  1. The rumor has been clarified by CSRC, which clearly stated that there had been NO policy change for M&A in China.
  2. Before the end of this month, NQ will receive about 80% of a payment, about $80 MM, from Jinxing Henrui for 13.13% of FL ownership. This transaction values FL Mobile at approximately $735 MM. However, the current NQ stock market cap is less than $450 MM (it was under $400MM while I was writing!).
  3. Within one month, NQ will receive about 50% of a payment, or roughly $68MM, from Dr. Shi for the recently announced MBO for 22% ownership of FL. That transaction values FL Mobile at about $626MM.
  4. With the two aforementioned payments, NQ will have basic cash per share of $4.16/share ($252 MM + $80 MM + $68 MM)/96 MM by Mid Jun.
  5. If the divesture for FL Mobile is successfully completed by the end of September, NQ will have a cash value of $10.05/share ($252MM + 735*0.78MM + 626*0.22MM/96MM). If we deduct the upcoming convert debt of 172MM, NQ will still have a cash value of $8.25/share. However, there are still some CSRC policy risks and uncertainties, so I estimate that NQ has about a 90% chance to successfully complete the FL divesture transaction.
  6. The earnings report date is coming up soon, sometime around the end of this month. During the earnings report event, we will get more updates about its business and FL's divesture progress.

My 52-week target price for NQ: For a bear case, the target price is $5, for a neutral case, the target price is $12, and for a bull case, the target price is $18.

I'll write a series of articles about NQ in the following couple of months to look in-depth into each and every aspect of NQ Mobile's business to justify my 52-week target price for NQ. Please stay tuned!

Disclosure: I am/we are long NQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.