Tuesday, May 3, 2011

Citron Research Slams Sky-Mobi (MOBI)

Just last week we highlighted the best performing stocks year to date, and topping the list was Sky-Mobi (MOBI) with a 312% return.  The past 2 days have been a horror show for the name as it has dropped from $22+ to $13... a 40%+ drop.  Live by the momentum, die by the momentum.  The stock was supremely extended, so yesterday sharp drop looked more like a stock that simply was returning to some level of support - but today we found out that Citron Research issued an intensely negative report, which has hammered the stock for the second day in a row.  It is quite possible some knew of the report yesterday and that was helping to cause the pressure.

Here is the full report, and it shows how the small cap Chinese stock space is ripe with risk, as a few outfits have taken to writing negative reports (some with very plausible reasoning) and in a space full of daytraders and momentum traders, when any of these stocks receive negative press they go south in a hurry.  As Citron wrote, this was a "broken IPO" - i.e. when it came public no one touched it; it fell sharply in its first day. Only during the current "Chinese internet" mania has it taken off.  This is pretty ironic timing right ahead of RenRen (RENN) coming public tomorrow.

Via Citron:

Citron Research understands and respects the recent surge in pre-eminent Chinese internet stocks. While the financials of many of these companies might not be compelling today, some offer unique business models and the potential to establish their dominant competitive positions in their spaces, driven by China’s rapidly growing internet user base. Whenever you get these manias, many companies “ride along on the coattails”. In the case of Sky-Mobi Limited (NASDAQ:MOBI) the company has manipulated the truth to hide their dying business model.

MOBI is not a leading application store in China. Even more important, MOBI is not a play on the Chinese mobile internet / social networking market. MOBI is not a tech company and does not have market share or disruptive technology.

The stark reality is that “feature phones”, which MOBI's business addresses, are inexpensive phones that DO NOT browse the internet, DO NOT have maps, GPS or local search, and are not capable of forming social networks, or participate in locally targeted crowd marketing apps like Groupon. They enable Chinese feature-phone users to text-chat with one another while playing simple graphical games on small screens. Users can also post text messages onto certain social network platforms like Facebook and Twitter.

Within the next couple of years, a new and cheaper generation of larger screen touch-screen Android-based smart-phones will sweep into the China cell marketplac, delivering this functionality. MOBI is just another wannabe in this market. There is no investment thesis in MOBI gaining a foothold in this new market against many better-capitalized competitors from its current business model.

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