In February of this year, we wrote an article about LifeLock (NYSE:LOCK) as it was heading into earnings. We made the points that the company was poised to keep falling for two reasons:
1. The company had a significant overhang in unknowns stemming from the FTC inquiry into the company and claims made by ex-employees.
This week, the FTC decided that it was done playing around with the company and put out a press release describing the action it plans to take against LOCK after corresponding with the company over the last year. The FTC release read:
The Federal Trade Commission today asserted that LifeLock violated a 2010 settlement with the agency and 35 state attorneys general by continuing to make deceptive claims about its identity theft protection services and by failing to take steps required to protect its users' data.
In documents filed with the U.S. District Court for the District of Arizona, the FTC charged that LifeLock failed to live up to its obligations under the 2010 settlement and asked the court to impose an order requiring LifeLock to provide full redress to all consumers affected by the company's order violations.
1) failing to establish and maintain a comprehensive information security program to protect its users' touchy personal data, including credit card, social security and bank account numbers;
2) falsely advertising that it protected consumers' touchy data with the same high-level safeguards as financial institutions; and
The company disagreed with the FTC announcement and mentioned that it will take the FTC to court. The company's official statement was,
"We disagree with the substance of the FTC's contentions and are prepared to take our case to court," the company's executives responded in a prepared statement. "Based on the evidence, we do not believe that anything the FTC is alleging has resulted in any member's data being taken."
Following up on the case, Consumer Reports released a scathing article on LOCK, calling the business "shady." This transitions into one of the two key reasons we think that investors should be avoiding LOCK here and not go "bargain hunting."
In addition to Consumer Reports being critical and general investor sentiment being poor, Deutsche Bank came out and defended the company on Wednesday,
Deutsche Bank analyst Nandan Amladi maintained a Buy rating on Lifelock Inc (NYSE: LOCK), while reducing the price target from $26 to $20, on account of legal uncertainty related to FTC charges against the company.
Amladi pointed out that the near 50 percent loss in the value of LifeLock, after the FTC announced that the company had "failed to live up to its obligations under the 2010 settlement" and sought full redressal for all affected consumers, was an "overreaction and unjustified."
Despite this response from the company and analysts, we don't believe that now is the time to go bargain hunting on LOCK. Here's two reasons why:
1. Much like Lumber Liquidators (NYSE:LL), we don't know the extent of the coming supplemental legal damage, let alone the impact of the "full redress" that the FTC is asking for. Until the FTC case is unsealed and the impact to the company's financials can be clearly laid out, buying here is far too speculative.
2. This is clearly going to have a negative impact on the company's public perception and sales that the company brings in. Until this impact is clearly gauged, we feel an investment here is pure speculation.
Sure, shares are "cheap" as pointed out in this article out on Wednesday that talks about all of the different valuation metrics the company can be gauged on. From an earnings and price/book perspective, LOCK has gotten a lot cheaper. What this article and others long the stock here fail to consider is what the ramifications of the brand and future lawsuits will be moving forward.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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