Wednesday, May 14, 2014

* NQ Mobile (NQ) - Earnings Preview for a Firm Accused of Being a "Massive Fraud."

NQ is trading $10.98, down 1.7% with IV30™ up 2.1%. The Symbol Summary is included below.

Provided by Livevol
  • Muddy Waters: [NQ] is a "massive fraud."
  • NQ rebuttal: "These are fully false allegations,"

UPDATE 5-15-2014

UPDATE 5-15-2014 (3:53pm EST)

The stock is dropping hard a day after the initial post. The news is below. Needless to say, as we read the rest of this article, the option market was not surprised.  These companies that teeter on fraud allegations (especially the ADRs / Chinese firms) blow through filing dates and drop bombs on shareholders almost at anytime.

Today is one of those times:

News: NEW YORK (TheStreet) -- NQ Mobile  (NQ_) plunged Thursday after the mobile security company issued a statement that it would be unable to file its annual report on Form 20-F on time.
The company said its needs additional time to complete the report. NQ Mobile previously disclosed this information in a press release on April 30 and in its Form 12b-25 filed with the Securities and Exchange Commission.


UPDATE 5-29-2014 (3:53pm EST)

The stock is catapulting down again and is now down 40% since the original post date just 15 days ago.

NQ Mobile Inc. (NQ), formerly NetQin Mobile Inc., is a holding company. The Company is a global provider of mobile Internet services focusing on security, privacy and productivity. The Company is a provider of Freemium subscription services with approximately 242 million registered user accounts in over 150 countries.

This is an earnings preview note and some huge volatility coming into this event after some toxic accusations of fraud that killed the stock.

While this post surrounds a specific company, we must continue to look broadly at the resounding accusations that Chinese based firms (trading on US exchanges and otherwise) have poor transparency at best, and fraudulent reporting at worst. Is this a fraud epidemic like the US saw in 2002?

I wrote a post nearly three years ago surrounding this issue, which you can read here:
9-29-2011: Is China A State Backed Accounting Fraud Epidemic?

Back to NQ, let's start with the Charts Tab (two-years), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

So I probably overdrew boxes, circles and arrows on that stock portion.  Basically, this stock moves a lot and has a two-year price range of [$5.07, $25.90], which is fantastically volatile.

Of late the stock made an abrupt recovery from ~$7 up to $22.33 level in less than six months and now has collapsed back down to a $10 handle in a matter of ~12 weeks.

Earnings are due out, and that event has been the catalyst for abrupt moves.  Let's look more closely at the volatility. The two-year IV30™ chart in isolation is included below.

Provided by Livevol

We can see a huge pop in the risk (implied volatility) on 10-24-2014 to over 254%.  That explosion in risk coincided with the stock drop from $25.90 to $8.80 in a week.

Why did the stock collapse?  Muddy Waters Research Group wrote, and I quote, that NQ is a "massive fraud."  Well there you go.

The firm in response wrote this: [The firm will] "open thekimono" in putting its accounts on display to rebut what it described as false allegations. (Source: Reuters).

Executives of New York-listed NQ said in an interview with Reuters the company will hold an investor conference call before U.S. markets open on Friday morning to respond to a report by the U.S.-based short seller that said the "vast majority" of NQ's reported China revenue was fraudulent.

"These are fully false allegations," said Henry Lin,co-founder and co-chief executive of NQ.

Source: Reuters via Yahoo! Finance: NQ Mobile to put accounts on display to refute Muddy Waters claims, written by Paul Carsten and Matthew Miller.

Well, as we saw, the stock price recovered, but now has fallen essentially all the way back down.  All of this means, there is huge risk in this earnings release.  Not just surrounding quarterly results, and forward looking statements, but from question on the CC surrounding these allegations.  And let me tell you, the option market does read this risk as huge.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

First, before we look at option prices, we can see the skew shape is "normal."  What's interesting about this normal shape is that the option market reflects greater risk of a downside move than an upside move.  You think those Muddy Waters' statements have had an effect?...

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Here we go.  The option market is pricing a a stock price range of [$8.25, $13.75] and a two day volatility of 395%.  Whoa...

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

1 comment:

  1. Your updated photo of NQ stock price is the same as the first photo.