Why Kerrisdale Capital Is Long Lifelock

Shares of

have lost nearly 50 percent of its value year to date due to ongoing concerns relating to a lawsuit with the Federal Trade Commission that could result in a sizeable financial penalty. In light of the ongoing FTC overhang, Sahm Adrangi of Kerrisdale Capital confirmed to Benzinga that his investment fund has acquired a passive position of approximately two percent of shares outstanding. "The short thesis is deeply flawed in many ways, and we've spoke to numerous channel checks that have helped us get comfortable with this business and its longevity," Adrangi said in an e-mail. Adrangi stated that he has extensively studied the bear case and still remains "comfortable" with his long position. Commenting on perhaps the largest overhang, an ongoing FTC inquiry that could result in a sizeable financial penalty, the investment manager is expecting a "reasonable settlement number" will be the eventual outcome. Adrangi argued that it is "very uncommon" for the FTC to impose a large settlement for a business that it doesn't want to shut down. In addition, large settlements north of $100 million for a business that it doesn't want to shut down is also "very uncommon." Finally, the specific charges that the FTC has brought against the company is "just not that serious."

Under an absolute "worst case outcome," the company could face a $500 million penalty in two years from now. "Alert throttling is bad, but explainable, and it's not a $500m offense," Adrangi argued. "And regarding data security weaknesses, no one's data was actually compromised. So in my mind, the signs point to a reasonable settlement number." To a "reasonable observer," Adrangi noted, a $150 million seems "very punitive given all the facts." Meanwhile, a $300 million fine is "totally atypical," but even with such a large settlement, the company is still at a 10x free cash flow multiple – which is "cheap if the growth continues." As it stands today, the company has $300 million in cash with no debt on its balance sheet. Meanwhile, the business generates $100 million of free cash flow a year, implying the company can generate enough cash to fully pay off a "worst case outcome." If a settlement is reached before two years, the company can borrow the difference and have no problem repaying a lender as the business "spits out a lot of cash." "The $500 million penalty number is an incredibly, incredibly conservative estimate," Adrangi wrote. "We are only using it to try to kill the business. We still cannot!" Adrangi finally pointed out that

settled its "fiasco that claimed 124 lives" with the Justice Department for $900 million. In addition to that, LifeLock has already hired "one of the best legal minds in the country," David Boies, to defend it.

Adrangi stated that LifeLock could be a "multibillion dollar company." In the meantime, he is "happy" to own a company generated an attractive free cash flow that is expected to continue growing as the company manages to expand its customer base by 20 percent a year. Within two years Adrangi is expecting LifeLock's earnings power to be north of $1.40. At 15 times earnings, this places a $21 valuation. Bottom line, at its current price, LifeLock's stock has a "very limited downside" and "double or triple on the upside."