NQ Mobile Short Sellers Have a Point

Whether you're an NQ Mobile bull or bear, and whether you think that the company is legitimate or not, at the end of the day it's important to approach the stock from a calm, rational point of view. While it's always fun to hope for a "short squeeze" in a stock where half of the float is shorted, it's tough to ignore that the short sellers may have some really credible arguments here.

Management is too promotional
One of the first red flags that investors should notice is just how promotional the management team is. Now, there's nothing wrong with wanting to get investors excited about your stock, but there's a difference between getting the story out and extreme exaggeration. For instance, NQ's Omar Khan has been quoted as saying, "We are building the company for the next 100 years".

Okay, that's wonderful, but just how many companies have a 100 year history, particularly in technology? Sure, one could point to IBM , which has been around since 1911, but throughout those 100 years the technology landscape has seen paradigm shift after paradigm shift, and IBM has had to dramatically change its business model over that time. Did any of IBM's original employees know what the company would look like or be doing today? No!

So, what right does NQ have to claim that it's building the business for the next 100 years when they have absolutely no idea what the tech landscape will look like in 100 years? This type of overly-promotional management certainly serves as a red flag for investors in a long-term story. Yes, management should be confident in their work and their vision, but without a dose of humility and realism; it's hard to trust management to be the best stewards of investors' hard-earned capital.

The growth expectations are extreme
There are plenty of high-growth names in the world of small cap tech - and those are the kinds of stories that make people serious money if identified early enough. Unfortunately, the expectations surrounding NQ Mobile are actually quite extreme. For instance, the company is expected to deliver 108% growth on a year-over-year basis in 2013. Fair enough - doubling revenues from a $92 million base isn't the hardest thing to do.

What should give investors a case of serious heartburn is that the four analysts covering the stock are expecting NQ to really knock it out of the park next year. In particular, the sell-side expects revenues growing a whopping 53.4% from $191 million to $293 million. Now, these expectations are in place largely because management has been hyping its "1-2-5" plan in which they expect $200 million in revenue by the end of 2013 and $500 million in revenue by the end of 2015.

Management also had the audacity to launch its "2-5-10" plan in which it hopes to have $1 billion by 2017. While the company may actually hit these goals, it's pretty silly to be promoting these types of "slogans." After all, NQ can "aim" for whatever they want in terms of revenue/profits, but will they deliver? Only time will tell, but if NQ doesn't, the shareholders are going to suffer for it.

Foolish bottom line
NQ Mobile just doesn't look like a company that investors should trust their hard earned money in. There's a reason that 50% of the float is sold short and, frankly, even if there is no fraud here (as Carson Block from Muddy Waters Research claims), management seems to be setting up extremely unrealistic expectations that, frankly, the market is no longer buying. Stay out of this stock - there are many better places to put your investment dollars.