Updated to include NQ Mobile's response to Muddy Waters' allegations.
NEW YORK (TheStreet) -- NQ Mobile (NQ) resumed trading after management held a conference call to dispute what it calls "false and inaccurate" allegations. Shares of the mobile services provider took a steep dive Thursday on warnings from the short-seller investment firm Muddy Waters Research.
The Chinese-based, U.S.-listed stock crashed 47% to $12.09 on Thursday before trading of shares were halted. Trading resumed just before 2 p.m. EDT and shares continued to fall 12.1% by close and an additional 2.6% in post-market action.
NQ Mobile called together a conference on Friday morning in an effort to make its financial position transparent. The company said it had commissioned an independent special committee to conduct a review of Muddy Waters' allegations. In the meantime, management issued details of the major term deposits in cash it currently has on hand.
A day earlier, Muddy Waters initiated a "strong sell" rating, calling the company a "massive fraud". Among the short-seller firm's claims, it alleged NQ had doctored figures pertaining to market share, number of customers and value of assets.
Muddy Waters questions the purported 55% real market share in China, which it says is more realistically around 1.5%, and claims of six million paying users in the country, which it says is more likely less than 250,000. Moreover, the firm alleges NQ's asset values are unsubstantiated and at least 72% of its 2012 China security revenue is "fictitious".
"We believe it is a 'zero'," the company wrote in its research report. "NQ's largest customer by far is really NQ ... NQ cannot monetize users that it does not have."
New York-based law firm Pomerantz Law has launched an independent investigation on behalf of investors in NQ Mobile to ascertain the validity of Muddy Waters' claims.
Before the dive, the stock had gained 278.8% year-to-date, reaching an all-time high of $25.90 a week earlier.
TheStreet Ratings team rates NQ Mobile Inc as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate NQ Mobile Inc (NQ) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- NQ's very impressive revenue growth greatly exceeded the industry average of 5.7%. Since the same quarter one year prior, revenues leaped by 107.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- NQ has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 4.70, which clearly demonstrates the ability to cover short-term cash needs.
- Compared to its closing price of one year ago, NQ's share price has jumped by 227.61%, exceeding the performance of the broader market during that same time frame. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Software industry. The net income has decreased by 8.3% when compared to the same quarter one year ago, dropping from $2.08 million to $1.91 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Software industry and the overall market, NQ Mobile Inc's return on equity is significantly below that of the industry average and is below that of the S&P 500.
- You can view the full analysis from the report here:NQ Ratings Report