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Steven Cohen's Sac Capital Advisors Increased Its Stake in NQ Mobile

March 28, 2014 | About:
James Miller Phd

James Miller Phd

3 followers

According to GuruFocus Real Time Picks, on March 14, Steven Cohen (Trades, Portfolio), the founder of SAC Capital Advisors added NQ Mobile Inc. (NQ), a leading global provider of mobile Internet services, at an average price of $18.28 and currently holds 7,716,580 shares of the stock, worth 0.91% of his portfolio. He now owns 5.1% of the company.

So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity in a declining price environment.

Recent Agreements

On Jan. 15, NQ and Sprint (S) have signed a definitive agreement where it would power Sprint Live, which is essentially a wallpaper replacement for all of Sprint's Android phones. Later, on Feb. 24, the company announced a deal where it would resell Samsung's KNOX mobile device security solution, benefiting from Samsung's presence in Asia.

Days ago, the company announced a new deal with Indonesia's Smartfren Telecom, the largest CDMA/EVDO telecommunications operator in Indonesia. "Smartfren has grown rapidly by keeping an eye on the needs of its customers, becoming the only operator in the region that also provides handsets," said Satyadev Sarvaiya, Head of Smartphone and Device Technology, Smartfre. NQ Mobile Security will be available from Smartfren under the name "Smartshield", and it will also be available for download in Smartfren's app store.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a better Zacks Rank, Dealertrack Technologies, Inc. (TRAK), Pegasystems Inc. (PEGA), Solera Holdings Inc. (SLH) or The Ultimate Software Group, Inc. (ULTI) could be the options.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 134.2x, trading at a premium compared to an average of 23.2x for the industry. To use another metrics, its price-to-book ratio of 2.7x indicates a premium versus the industry average of 2.52x and the price-to-sales ratio of 6.13x is above the industry average of 2x. The metrics indicate that the stock is relatively overvalued relative to its peers.

Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago (-$0.05 vs $0.01). We include in the next graph the stock price because EPS often lead the stock price movement.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With a ROE of 4.53% is above the industry mean of 7.18%. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

NQ

NQ Mobile

4.53

TRAK

Dealertrack Technologies

0.98

PEGA

Pegasystems

14

SLH

Solera Holdings

12.74

As we can see, the firm has a higher ROE than Dealertrack Technologies but lower than the other comps.

Final Comment

NQ´s revenue growth was very good (110% compared to the previous quarter) but net income has significantly decreased when compared to the same quarter one year ago, from $0.35 million to -$2.72 million. On the other hand, it has a solid financial position with reasonable debt levels and relatively good stock price appreciation. Apart from numbers, NQ received multiple honors at the 10th Annual Global Excellence Awards celebration in San Francisco. Based on criteria including market and product line expansion and percentage of overall growth, NQ Mobile was awarded "Gold" as Best Overall Security Company of the Year as well as for Business Expansion of the Year and Fastest Growing Security Company of the Year.

In conclusion, taking into consideration the recent agreements, the awards and Cohen´s bet, I would recommend investors to consider adding the stock for their long-term portfolios.

Disclosure: James Miller holds no position in any stocks mentioned.


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