LifeLock (LOCK): An identity theft protection company, using a subscriber model that is marketed directly to consumers. Market cap $1.2B.
- This company could potentially be exposed for lacking a value-added service, fraud, or false advertising…again.
- It is competing in a bad space; the industry has slow growth, is competitive, and is becoming saturated.
- It is promoted and valued as a growth tech stock, but it is clearly in the services space.
1. Industry experts have been quoted saying that LOCK’s basic level service package is useless. It offers no services that a consumer could not easily do himself. Examples are that consumers could monitor their own credit or add themselves to do-not-disturb lists. Most subscribers use the basic package. Even more expensive services are also of little benefit. For example, wallet protection where the company will call your credit cards for you when your wallet has been stolen. The company was fined by the FTC in 2010 for deceptive advertising, which could happen again. Since its services do not offer much to consumers the company must resort to questionable advertising to convince customers of the need for its services. LOCK does not even protect consumers from wage or tax fraud, which are the FTC’s two most common types of identity theft. However, people may continue to pay for the services unless a regulatory body steps in.
Robert Maynard, cofounder, left the company in large part due to his checkered past of bad business practices, fraud, and arrests. Anyone who would collaborate with this person in my mind is suspect. I think the company is at high risk of accounting fraud and bad business practices. I also believe that the ~$400 estimated value per customer is alarming. I would like to research how competitors calculate customer EV. I would also like to dig further for any aggressive accounting practices.
2. A negative earnings surprise could occur because growth in the industry is slow and the cost to acquire new customers is becoming more expensive as the market becomes saturated. The identity protection space is $3.5-4B and growing slowly. IBIS World predicts 4.2% growth this year. Competition is fragmented and fierce; there are 79 players in this space. Large banks service 50% of the current demand. LOCK has been aggressively building market share by increasing advertising spending. The cost to acquire a new customer is up to $160; this is in contrast to $150 at the end of 2012. This is a major expense since the average subscriber pays only $10.81 a month.
Identity protection is a commoditized product. Competitors use the same data and services for information, making it harder for LOCK to stand out.
The B2B revenue (~6% Revenue) is shrinking because of increased regulation. COF settled a $215M suit related to deceptively providing identity/fraud protection for similar services.
3. LOCK is touted by management as a growth tech company, but it is clearly in the services space. Its valuation is way out of line with INTX, the only true pure-play competitor. This is due partly to the fact that INTX competes in the shrinking B2B space, but INTX could easily replicate LOCK’s business model.
Next steps: I plan to dig deeper into competitors’ plans, expected value per customer calculations, and regulatory developments.
Potential catalysts: Missing top and bottom line guidance, a multiple correction from the street after pricing LOCK as a services company, and FTC/legal sanctions.