Since the start of 2014, Neustar (NYSE:NSR) has dropped over 40% over fears that it may lose an annual $500 million number portability service contract with the FCC to Ericsson (NASDAQ:ERIC)AB's Telcordia. Number portability allows phone numbers to be transferred to a new device or service provider. Neustar has had this contract for many years with little competition and is lobbying aggressively to ensure it is kept.
The sharp decline in Neustar's stock price suggests a lack of faith in Neustar if this contract is not renewed. For Ericsson, it is unlikely this FCC contract will have a significant impact on the overall company. This contract is only worth less than 0.25% of its yearly revenue making it insignificant toward any investment decisions about Ericsson, although a good relationship with the FCC could be beneficial.
However, Neustar has three other intriguing services lines, primarily for the e-commerce industry, that have great potential future growth: marketing services, data services, and IT/security services. Although these services account for less than half of Neustar's revenue, they account for 60% of revenue growth in 2013.
Neustar's marketing services focus on maximizing effective usage of both internal and external consumer data. These services help companies determine ideal customers, provide customized and personalized content, and measure the efficacy of digital media. With business-to-consumer e-commerce sales expected to total $1.5 trillion in 2014 and grow to $2.35 trillion by 2017, companies are likely willing to spend a lot of money to attempt to maximize the efficiency of their online business. Customization of business-to-business sales is also expected to grow so that by 2018, 70% of business-to-business e-commerce sites will be personalized for each customer.
In order for a company to take full advantage of customized and personalized marketing, it must first effectively gather data to use. Neustar provides many data services including data auditing and data migration. Data auditing helps companies confirm that the data they have gathered are accurate, relevant, and usable. Data migration moves and stores data for companies in an easily usable format for analysis.
Neustar also provides specialized IT and security services targeted toward e-commerce websites including web traffic load testing, payment-fraud detection and distributed denial-of-service attack or DDoS protection. A DDoS attack is when a website is intentionally overloaded with targeted illegitimate traffic from many different sources preventing legitimate users from gaining access, causing long delays or outages. These attacks are difficult to defend against because distinguishing between the attackers and regular users is challenging. Substantial financial losses are incurred from downtime caused by these attacks. Neustar offers affordable cloud-based protection.
Some estimates suggest the rate of these attacks has grown by over 200% from 2013 to 2014 with attacks also becoming much more sizable and longer lasting. There is even a small group led by the hacker organization, Anonymous, petitioning the US to legalize DDoS attacks as a form of protest. Although this petition is unlikely to bear fruit, the dramatic increase in scope and frequency of attacks will lead more and more companies to invest in DDoS protection.
Right now, the most important event for the short-term success of Neustar will be the renewal of the number portability contract. If the FCC renews this contract there will be a huge upside for Neustar investors. If not, Neustar may still be able to remain successful in the long run through growth of its other three business sectors whose services will only become more valuable as e-commerce continues to grow and DDoS attacks increase. Although there is significant risk due to uncertainty from the FCC contract, Neustar may still be a good buy especially at a 40% discount from its price at the end of last year.