Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Should Symantec buy LifeLock?

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One of America’s sleaziest and most questionable companies; LifeLock (NYSE: LOCK) might soon disappear. The bottom-feeding identity protection service Lifelock has been acquired by the security software provider Symantec (NASDAQ: SYMC) for $2.3 billion or $24 a share.

The deal is an interesting one because LifeLock’s value is dubious. It claims to have 4.4 million customers; yet the company reported a free cash flow of $3.664 million, and a net income of $18.39 million on September 30, 2016.  That was an improvement over June 2016, when LifeLock reported a net income of -$61.16 million.

LifeLock is not making any Money

Nor was LifeLock generating any float from the service plans it sold. The company reported losing -$53.72 million in cash from operations on September 30. It also had $166.10 million in the bank and assets of $525.72 million at the end of third quarter.

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It looks as if LifeLock is making little or no money from those four million customers. So one has to wonder what exactly is Symantec buying here. After all LifeLock provides no real product, it simply sells a service that claims to tell you if your identity has been stolen.

Nor is LifeLock’s revenue anything to write home about, it reported revenues of $650.16 million on September 30, 2016. That was an increase of $18.34 million over second quarter 2016, and $89.16 million over September 2015. For the record LifeLock reported revenues of $561 million in September 2015 and $631.82 million in June 2016.

Revenue growth of $89.16 million over a year does not seem to justify Symantec’s acquisition. The only reason that Symantec wanted LifeLock was for its’ customer base and marketing capabilities.

Why Symantec Wants LifeLock

My guess is that Symantec wants to expand its customer base by buying LifeLock’s. The hope is that it can sell Norton antivirus to LifeLock’s customers. Another hope might be that LifeLock can reach customers that would normally be unavailable to Symantec.

LifeLock advertises heavily to reach older less tech-savvy customers. It runs lots of TV ads and buys a lot time on radio shows such as Rush Limbaugh’s program. Rush is still the biggest name in talk radio despite his recent troubles.

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Such people might not be familiar with antivirus, but they are afraid of cybercrime and identity theft. Symantec is hoping to use LifeLock as a gateway marketing channel to sell antivirus and other products to those customers.

An Expensive Marketing Channel

The financial numbers indicate that Symantec definitely needs some new marketing channels. Its revenues have fallen by $3.64 billion over the past three years.

Back in September 2013, Symantec reported revenues of $6.885 billion that had fallen to $3.645 billion just three years later. Symantec has been losing market share and needs to increase it. One way to do that is to buy a company with growing revenues but little cash.

If that’s the case it’s a rather expensive marketing channel for a modest company like Symantec. Symantec had a market cap of $15.49 billion on November 23, 2016, and assets of $16.86 billion on September 30, 2016.

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Is Symantec Making Money?

The interesting thing about Symantec from a value investor’s point of view is that it has a lot of float. Symantec reported have $5.619 billion in cash and short-term investments and making $2.024 billion in cash from investing and $942 million in cash from financing on September 30.

The problem was that its operations were not making any money. It reported a negative cash from operations figure of -$355 million on September 30, 2016. The company also reported a free cash flow of $38 million on the same day which indicates that its operations may not generate any float.

The big value from software companies is all the float that they generate from licensing and membership sales. There is little evidence of that at Symantec even though it reported $2.206 billion in revenue on September 30, unfortunately most of that revenue came from investing not its operations.

The company actually reported a negative profit margin of -14.71% on the same day. It seems to lose from day to operations, but make some cash from financing.

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Is Symantec a Value Investment?

Naturally some value investors will wonder about Symantec because it operates in a dusty corner of the tech world and has a lot of cash. Is this company a good investment?

In the short term perhaps, Symantec did give investors a 48.83% return on equity at the end of third quarter 2016. It is a good speculative play but what income?

That’s where things get interesting; Symantec investors did receive a 1.54% dividend yield on November 23, 2016. That translated into a 7.5¢ dividend – paid out on November 17, 2016.

That was down from the 15¢ dividend that Symantec paid out in 2014 and 2015. Yet Symantec’s dividend has been far higher, on March 4, 2016, its investors received a onetime $4 dividend.

This makes Symantec a pretty good dividend stock. So it’s actually a fairly good investor for a smaller tech company; largely because it pays a dividend unlike most of the really cheap tech stocks.

Therefore if you have a high tolerance for risk and you want to add a cheap tech stock to your portfolio, Symantec is worth a look. Although I think it was overpriced at the $24.85 a share it was fetching on November 23, 2016. LifeLock may or may not be a good purchase for Symantec, but SYMC might be a good addition to your portfolio.