LifeLock is a leading service provider of identity theft protection. The company monitors new account openings and credit-related applications for unauthorized use of its member’s personal identification information. For an annual subscription, members receive alerts of unauthorized identity use, and if necessary, help in restoring a member’s identity. As demonstrated by Yahoo’s recent cyberattack that compromised over 500 million of its members’ accounts and personal information, cybercrime is a growing problem that is not going away anytime soon. High profile attacks, like Yahoo, keep identity theft fresh in people’s mind and is the best type of advertising for a company like LifeLock. The company believes that there are over 78 million people in the United States that fit its members profile. And even though LifeLock is the leading provider of identity theft protection, with only 5% market share, there is still significant room for it to grow.
In July of 2015, LifeLock shares plunged over 50% in the course of three days; the market reacting to news that the Federal Trade Commission (FTC) was taking action against LifeLock for allegedly violating a 2010 order surrounding deceptive advertising and insufficient security required to protect its member’s sensitive information. The market was fearful that the negative publicity along with the rumored $500 million fine would be the death knell for a company whose business is to prevent its members’ identity from being misused.
Being familiar with the company and its business model, Hazelton Capital Partners revisited LifeLock focused primarily on the potential fine, the company’s brand, and the long-term impact on both earnings and cash flows. Over a number of weeks, our research led us to believe that the company was not only viable, but that the market’s knee-jerk reaction had provided a meaningful investment opportunity. There was no doubt that the FTC allegations were going to have a negative impact on the company’s short-term expenses and profitability, but much of the expected earnings decline was more than reflected in the current stock price. As for the FTC fine, the rumored $500 million was not commensurate with the violation, given that the actions took place over a two year period (between 2012 & 2014), and the company had already taken steps to correct its deceptive advertising and lack of security protocols 12 months prior to the FTC bringing the case. Hazelton Capital Partners purchased shares in three tranches, with an average cost basis of $8.14/share, as our continued research provided increased comfort with company and its long-term earnings. By December of 2015, LifeLock had settled with the FTC, paying a $100 million fine.
In August 2016, a little over a year since the FTC charges and the steep decline in LOCK’s share price, both LifeLock’s revenue and membership had grown by over 15% and the company’s share price had rallied over $17/share. Given the recovery in the share price, Hazelton Capital Partners decided to exit its LifeLock position. An argument could be made that there still was more upside available if Hazelton Capital Partners were to be more patient. The decision to sell out of the LOCK position was not predicated on lack of patience but rather portfolio management. Hazelton Capital Partners is steadfast about limiting its portfolio holdings to just 20 positions, and at the end of August, a new position was slated to enter the portfolio. LifeLock was chosen to be replaced not only because it was the holding closest to it intrinsic value, but also because the new holding’s balance sheet closely resembled that of LifeLock.
This article has been excerpted from a letter to partners of Hazelton Capital Partners.