Lifelock: 8-K Reveals FTC Investigation

Mar.18.14 | About: LifeLock, Inc. (LOCK)


8-K discloses FTC Investigation.

Lifelock trades at over 50x P/E and shareholders seem to be ignoring this risk.

Herbalife, which also is facing potential FTC action trades at less than 9x P/E suggesting downside for LOCK shareholders.

In February I wrote an article highlighting that Lifelock's (NYSE:LOCK) 10-K stated that the company expected to be the subject of an FTC investigation. Yesterday, Lifelock issued an 8-K noting that it is, in fact, subject to an FTC investigation. From the 8-K:

In its Form 10-K for the period ending December 31, 2013, filed on February 19, 2014, LifeLock, Inc. ("LifeLock") disclosed that it had met with the Federal Trade Commission ("FTC") and that LifeLock thereafter expected to receive a request from the FTC for documents and information. On March 13, 2014, LifeLock received, as expected, a request from the FTC for documents and information related to LifeLock's compliance with the FTC Stipulated Final Judgment and Order for Permanent Injunction and Other Equitable Relief that LifeLock entered into in March 2010. LifeLock intends to cooperate with the FTC in these requests.

Recall that in 2010, Lifelock settled with the FTC after the FTC claimed that Lifelock was making misleading claims in its advertising. According to the company's 2013 10-K, the FTC became interested in Lifelock after whistleblowers approached the agency. I suspect whistleblowers may be alleging that Lifelock is once again making misleading claims in advertising its product.

One common complaint amongst Lifelock customers (current and former) is that Lifelock says it will alert customers when a credit check is performed on them. There are numerous instances (I've spoken with people and seen multiple posts on Lifelock's Facebook page) of people making significant purchases (applying for a mortgage, buying a car, or getting a new credit card) which require a credit check but not being alerted by Lifelock. It is possible that Lifelock is making claims to customers which it is simply unable to fulfill.

One of the FTC's original complaints against Lifelock (back when it began investigating the company in 2008-09 prior to the settlement) is that Lifelock's advertising implied that it was able to prevent identity theft which it (nor anyone else) is really able to do. Some of today's advertisements by Lifelock seem to imply that identity that identity theft is less likely if a person subscribes to Lifelock though Lifelock has no way to actually prevent identity theft.

It is worth noting that in its 10-K, Lifelock seems to admit that it is in violation of the terms of it's 2010 FTC settlement on the basis that it provides a fundamentally different service to customers based on enhancements made to products. From the 10-K:

However, the bulk of the more specific injunctive provisions have no direct impact on the advertising and marketing of our current services because we have made significant changes in the nature of the services we offer to consumers since the investigation by the FTC in 2007 and 2008, including our adoption of new technology that permits us to provide proactive protection against identity theft and identity fraud. The FTC investigation of our advertising and marketing activities occurred during the time that we relied significantly on the receipt of fraud alerts from the credit reporting agencies for our members. The FTC believed that such alerts had inherent limitations in terms of coverage, scope, and timeliness. Many of the allegations in the FTC complaint, which accompanied the FTC Order, related to the inherent limitations of using credit report fraud alerts as the foundation for identity theft protection. Because the injunctive provisions in the FTC Order are tied to these complaint allegations, these injunctive provisions similarly relate significantly to our previous reliance on credit report fraud alerts as reflected in our advertising and marketing claims. The FTC Order also imposes on us and Mr. Davis certain injunctive provisions relating to our data security for members' personally identifiable information. At the same time, we also entered into companion orders with 35 states' attorneys general that impose on us similar injunctive provisions as the FTC Order relating to our advertising and marketing of our identity theft protection services.

While investors seem complacent (or unaware) regarding the FTC's inquiry into Lifelock (the company trades within 9% of it's all-time high, shareholders could see significant losses if investors become more concerned about the impact of the FTC investigation on the company's business. Herbalife (NYSE:HLF) has fallen 36% from its January high following news of an FTC investigation and now trades at less than 9x earnings despite having a double digit EPS growth rate. Lifelock trades at over 50x EPS (nearly 60x after normalizing its tax rate) and shareholders could be in for a nasty surprise if the market becomes more focused on what could go wrong than what could go right.

Disclosure: I am short LOCK. 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.