Trade of the Day: LifeLock (LOCK)

A password to unlock future profits

   

I was helping a good friend of mine over the weekend restore some data after a hard drive crash. He is not much older than me, but old enough not to have used a computer before he was in his late 20s. Without being completely unfair, he is a little technically challenged and I don’t think that is unique within his age-group and higher. As we worked together he told me a few of his passwords so we could get his bookmarks and applications setup. My question at that point was, “Do you really expect the password ‘Passw0rd’ to effectively keep anyone out of your system?”

According to Slate.com, the most common password is even worse than the one my friend used. Currently ‘123456’ is the most common and took the number one spot from ‘password’ last year. I tend to be a little more security paranoid, but I could not convince my friend to convert to double-authentication and long, complex passwords. I really don’t think my friend is unique in this way. The bottom line is that a lot of folks will have their email, accounts, finances, and computers hacked because they are just not very security conscious.

I think that most people will probably focus on damage mitigation when they are hacked than on prevention. This is similar to an aggressive driver’s attitude in an expensive car with comprehensive insurance. That is where there is an opportunity with LifeLock (LOCK).

The company probably sounds familiar because its advertising is everywhere. They promise to monitor your credit score, bank accounts, criminal records, etc. and alert you to any changes. Theoretically, this should allow my friend (or anyone else) with bad password management to head off a criminal attempting to steal his identify before he suffers any real damage.

LifeLock promises to spend up to $1 million to help you restore your financial life if your identity is actually stolen. Since the CEO of LifeLock has had his identity stolen 13 times since posting his Social Security number on a mobile billboard, they have to admit that it’s still possible to be an identity theft victim, but the guarantee to help solve the problem is still attractive.

LOCK is an online security company, but its core-competency is marketing. Its sales efforts have led to an unbroken string of rising quarterly revenue. Margins are attractive and it was able to start turning a profit in 2012. However, there are a few negatives associated with LOCK’s marketing power.

LOCK ran into three issues this year that led to more than a 50% drop in the stock. First, the FTC has shown that LOCK was making claims in its marketing that were not true. Some of the monitoring products that the company claimed to provide don’t exist or were substantially different than what it had advertised. There are no apologetics for what the company did, which is good for new investors because it is unlikely the company will repeat its mistakes in the future. It also proves the business model can stand on its own without making false claims.

Second, LIFE bought a mobile security company (Lemon) with products that were later shown to not be compliant with the credit card industry. That setback is significant but didn’t represent an end to LOCK’s mobile initiatives. The mobile product was not a serious source of revenues yet, but it still hurt the stock.

Finally, the entire industry has run into problems offering their products through banks and financial firms. LOCK’s competitors, Experian and Intersections (INTX), pursued a marketing model that almost entirely relied on institutional marketing partners. However the Dodd-Frank rules have made that business untenable in the short term. This has hurt LOCK, as well, but not even close to the same extent because its subscriptions are mostly sold direct to the consumer.

From a technical perspective, I think the price is showing that investors feel comfortable that the bad news was overpriced and growth is likely to re-emerge.  As you can see in the next chart, the stock has been stuck in a ‘rising wedge’ since May of this year when earnings disappointed. A wedge can’t be considered a breakout on its own until the price actually closes well beyond resistance (or support). I like an entry at this point for a new long position but that is conditional on a strong close above $15 per share.

Password
Click to Enlarge

LifeLock (LOCK): Chart Courtesy of eSignal

It seems reasonable to us that the long-term prospects for LOCK are bright. You insure your home, car, job, etc., so why not your identity? As I mentioned above, most people have such lax controls already that insurance and monitoring is an absolute necessity.

The stock is building momentum and its fundamental performance compares favorably to other high-value internet companies like LinkedIn (LNKD), Salesforce (CRM), and Facebook (FB), but their valuation ratios are much lower. The company has been too aggressive in its marketing in the past, so some of the current discount is well deserved. However, despite LifeLock’s issues, it is virtually the only company able to grow by selling direct.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/08/lock-password/.

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