NQ Mobile (NQ) is a Chinese b2b software company that gained notoriety amongst investors and traders last year when Muddy Waters announced it was short the company and its real value was zero. Since then, a fierce battle between Carson Block and NQ’s management has resulted in a lot of volatility for the name, and a lot of opportunity for short-term and long-term traders to bet on which side is right. Even neutral parties have been able to bet on mean reversion with the name for several months.
Most recently, the stock has fallen steeply as accounting troubles hit NQ. In April, the company disclosed “an accounting overstatement relating to share based compensation expense” for 3Q 2013, news that investors were not happy to see since the company’s accounting has been the focus of Block’s attack. Later that month, a critical note by Goldbaum Research hit the stock even more, as competitive pressure and questionable expenses were cited as reasons to doubt the company’s value.
More bad news came a month later, even after an announcement that the firm had partnered with Sprint (S) for an interactive wallpaper replacement product for HTC One smartphone users on Sprint. That deal couldn’t buoy the name after the company announced it would delay releasing its 20-F for 2013 in mid-May, because the firm was awaiting the conclusions of Deloitte’s audit of the company. This was the push bears needed, causing the stock to crater over 26% on the news, bringing the name near its 2012 price levels. At that point, the controversy provided an attractive entry point for bulls, and confirmation of the short thesis for bears.
Friday morning, the company has risen over 20% with a guidance boost from management, but no news of a completed audit is keeping the controversy alive.
Right now, the controversy remains unresolved, but the historical price action demonstrates an important lesson in finance: he with the most knowledge wins. A tremendous amount of public information about NQ has been made available both by Block, by management, and by third parties. This information, properly analyzed and understood by someone who understands Chinese business practices and generally accepted accounting principles, can provide a tremendous opportunity for outsiders and third-parties to make a tremendous amount of money.
In many cases, particularly in the retail environment, investors will place bets on the growth of a sector, the hype of an emerging trend, or expectations that they can find more efficient prices than the market as a whole. Usually, these investors do poorly. In the professional asset management business, investors instead look for opportunities to leverage their own specialized knowledge and the information available to the market in general to analyze potentials in the market that are previously underappreciated or misunderstood. NQ Mobile, for bulls and bears, has presented such an opportunity for over a year, and that opportunity is likely to continue.