Disclaimer: The analysis is the expression and assessment of investments right now. They cannot replace individual counseling. Always research and evaluate the investments you are considering based on your investment strategy, risk, and time horizon. Therefore, following the recommendations, you are responsible for any losses you may incur.
Info about the company:
VeriSign, Inc. (VRSN) and its subsidiaries provide domain name registry services and internet infrastructure. This helps people navigate the internet by matching user-friendly domain names to the corresponding number-based Internet Protocol (IP) addresses. VeriSign ensures the security, stability, and resiliency of internet infrastructure and services. They operate with two of the 13 internet IP services. VeriSign also offers registration services and authoritative resolution for the .com and .net domains, supporting global e-commerce. .Com and .Net are some of the most popular top-level domains (TLD). The lucrative contracts run for six years and have a presumptive right of renewal provided Verisign meets its contractual obligations. The .com and .net contracts are up for renewal in 2024 and 2029, respectively. VeriSign, Inc. was established in 1995 and is headquartered in Reston, Virginia.
Geographical sales: United States (67%), Europe (15%), other (12%), China (6%)
Segment sales: Domain service (100%)
Moat: Wide (→)
Prologue
In a world where everybody is talking about the next breakthrough in the technology segment, few (of the ones I know) people know about Verisign (VRSN). At present, VRSN is the exclusive provider of domain registries for servers on .com and .net. The .com is the most recognized top-level domain, and VRSN holds a monopoly position as the sole provider. Every 6 years VRSN renews its contract with ICANN, which is a non-profit organization, that does not try to optimize profit with all costs. In 2024, however, the contract is due to be renewed. This can be the reason for why the stock price hasn’t changed much because the market is waiting for the outcome of the negotiation of the contract.
Growth - Quality score 4 out of 5
In the last 10 years, the revenue has consistently increased, indicating a positive trend for the future. VRSN benefits from the trend of creating webshops for hobbies or business. A website is essential as long as the internet is a way to earn money. Furthermore, .com is definitely seen as the most popular listed domain. Nearly every company with a certain ambition for worldwide recognition has this domain. The lucrative contracts run for six years and have a presumptive right of renewal provided that Verisign meets its contractual obligations, meaning that when the obligation is fulfilled VRSN has stable income in the years to come.
The number of domains varies with the economy, making the industry cyclical. A domain is essential for many companies, and having a domain related to a company's brand makes sales less volatile. VRSN's monopoly position makes it susceptible to regulation by investigating politicians. Additionally, VRSN is regulated to maintain a specific price increase. This restricts the company from offering its services at an optimized price relative to supply and demand. Also, there is a risk that the price could remain frozen at its current level. The 2012 .com agreements had a price freeze for six years under the Obama administration, while the 2018 renewal under the Trump administration removed the price controls.
Business - Quality score 5 out of 5
Verisign has exclusive registry rights for two of the world’s most popular TLDs, .com and .net, under renewable contracts with the Internet Corporation for Assigned Names and Numbers, or ICANN. The lucrative contracts run for six years and have a presumptive right of renewal provided Verisign meets its contractual obligations. Verisign currently charges $9.59 per year for a new or renewed .com domain and $9.92 for a .net domain, which makes income recurring. Furthermore, the contract is adjusted for inflation. This means that prices for VRSN service will follow the minimum inflation rate and therefore it is inflation-proof. While Verisign faces competitive pressure from competing TLDs, it is expected that .com to remain the world’s most popular TLD.
The potential loss of the .com and .net contracts would greatly impact Verisign's income and shareholder value. Verisign is known for providing reliable services and enhancing global internet infrastructure stability and security. Therefore, it seems unlikely that VRSN will lose its contract because they have fulfilled its obligation in the last 27 years. A cyberattack could result in the loss of their contract, but VRSN has invested in software and infrastructure to support the security and stability of their services and growing volumes.
Management - Quality score 3 out of 5
Several of the members of the Executive Team have been there for a decade, which indicates that VRSN's future performance is foreseeably close to what it has done historically. Furthermore, Berkshire Hathaway is the largest owner with around 13% of outstanding shares. While Berkshire Hathaway doesn't have a lot of skin in the game, it is noteworthy that they own VRSN which indicates a certain quality of the company. VRSN has allocated almost all of its income to repurchase shares, which is acceptable.
The ownership is low, and no one has skin in the game. Even the biggest shareholder, Berkshire Hathaway, only makes up for below 1% of Berkshire Hathaway's total holdings. Furthermore, management's holdings do not comprise the total outstanding shares, meaning their vote does not have a huge impact when voting for major decisions. Furthermore, management has pre-empted and bought a larger amount of outstanding shares than the annual income, which can't hold up in the long term. However, the financial balance is still healthy, and the current share buyback shouldn't be a financial issue in the short term.
Financial
Looking at revenue and operating income, VRSN hasn’t had a negative growth rate year-to-year, indicating a certain stabilization and a chance that the financial trend isn’t a one-year thing. The stabilization also results in the equity ratio being more useless, and the total debt / EBITDA ratio is more relevant to use to get an indication of how much leverage the company has. Furthermore, VRSN has close to no goodwill, and the balance sheet has fewer estimated assets. In a decade VRSN has improved its profitability and is on its highest level, meaning it isn’t estimated that the profitability will continue in the years to come.
|
USDmm |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
Avg. Growth |
|
Revenues |
1.010 |
1.059 |
1.142 |
1.165 |
1.215 |
1.232 |
1.265 |
1.328 |
1.425 |
1.493 |
4,4% |
|
Operating Income |
564 |
606 |
687 |
708 |
767 |
806 |
824 |
867 |
943 |
1.001 |
6,6% |
|
Net Income |
355 |
375 |
441 |
457 |
582 |
612 |
815 |
785 |
674 |
818 |
9,7% |
|
Diluted EPS |
2,52 |
2,82 |
3,42 |
3,68 |
4,75 |
5,15 |
7,07 |
7,00 |
6,24 |
7,90 |
13,5% |
|
Dividends Per Share |
|
|
|
|
|
|
|
|
|
|
NA |
|
Payout Ratio |
0% |
0% |
0% |
0% |
0% |
0% |
0% |
0% |
0% |
0% |
NA |
|
Diluted Shares Outstanding |
140,90 |
133,03 |
128,83 |
124,18 |
122,66 |
118,97 |
115,30 |
112,20 |
108,00 |
103,50 |
-3,4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Total |
1.901 |
2.358 |
2.335 |
2.941 |
1.915 |
1.854 |
1.767 |
1.984 |
1.733 |
1.749 |
-0,9% |
|
Total Equity |
-883 |
-1.070 |
-1.201 |
-1.260 |
-1.385 |
-1.490 |
-1.390 |
-1.261 |
-1.562 |
-1.581 |
6,7% |
|
Equity Ratio |
-46,5% |
-45,4% |
-51,4% |
-42,8% |
-72,4% |
-80,4% |
-78,7% |
-63,5% |
-90,1% |
-90,4% |
7,7% |
|
Total Debt / EBITDA |
2,17 |
2,80 |
2,51 |
3,18 |
2,19 |
2,10 |
2,06 |
1,95 |
1,81 |
1,72 |
-2,5% |
|
Operating Margin |
55,9% |
57,2% |
60,1% |
60,7% |
63,2% |
65,5% |
65,1% |
65,3% |
66,2% |
67,0% |
2,0% |
|
Net Income Margin |
35,2% |
35,4% |
38,6% |
39,2% |
47,9% |
49,7% |
64,4% |
59,1% |
47,3% |
54,8% |
5,0% |
|
Return on investment (ROI) |
29,7% |
25,7% |
29,4% |
24,1% |
40,1% |
43,5% |
46,6% |
43,7% |
54,4% |
57,2% |
7,6% |
Valuation
First of all, Verisign has a monopoly position, meaning that the requirement of return is lowered from 7% to 5%. Verisign doesn’t pay dividends, but they repurchase shares. The amount of shares repurchased is close to the net income and free cash flow. In a realistic scenario, the revenue growth is close to 5%, and the repurchase of shares gives an estimated revenue per share of around 8,8%. This gives an Earning power above 1 even with a required return of 7%.
In the worst-case scenario, the revenue growth is around 2%. This requires that the contract follows a low inflation rate, and profit margins are close to 10 years average period. In the realistic and optimistic scenario, the revenue growth is estimated to be around 5%, which is a bit higher than average. Furthermore, VRSN will continue to repurchase shares close to its net income, which gives an expected revenue growth per share of 8,8%. The difference between the realistic and optimistic scenarios is how big the profit margin will be. In a realistic scenario, the margin is a bit smaller than the current moment and the optimistic is closer to the current moment. Combining all scenarios the average return is 28% at the current moment.
|
Scenario |
Worst |
Realistic |
Optimistic |
|
Expected growth |
5,8% |
8,8% |
8,8% |
|
Expected payout rate |
0% |
0% |
0% |
|
Earning power |
1,16 |
1,76 |
|
|
Expected margin |
48,0% |
50,0% |
53% |
|
Expected P/E |
25,72 |
23,29 |
|
|
Expected EPS |
7,34 |
7,65 |
8,11 |
|
P/E (Fair) |
23,19 |
35,19 |
|
|
Price target (12 months) |
170 |
285 |
|
|
Price target in % |
-18% |
38% |
|
|
Price target in % (current price) |
-10% |
43% |
51% |
Compare this valuation to what the market on average has been willing to pay for this type of stock, and it has an average P/E of 30, which means a potential upside of 22%. However, the spread from the average P/E is wide. In the last 10 years, the P/E has fluctuated between 13,51 (2014) to 47,18 (2021), which makes it more realistic that the market will be willing to pay a P/E of 35 (according to the valuations figure above).
|
Relative analysis |
P/E |
|
Potential P/E (realistic) |
24,69 |
|
Average |
30,00 |
|
Valuation changes in % |
22% |
|
Price target (12 months) |
229,47 |
Overall, the realistic potential return in 12 months is around 22%-28%, and if the realistic scenario is correct the return could be 43%. Additionally, there are only six analytics that are analyzing VRSN, which I consider a low amount considering the size of its market cap, meaning that prices are at a greater risk of being mispriced.
Conclusion
Because the VRSN has a monopoly position, the required return is lowered from 7% to 5%. The main driver of growth is the opportunity to increase prices, which are regulated, but should follow the average long-term inflation rate. Its position as a provider of .com is essential to generate income. The reason stock With over 27 years of providing this service, it seems unlikely that they will lose the opportunity to renew their contract. .com's contract is up for renewal in 2024, which has contributed to the recent drop in the stock's value. However, the risk of losing the contract means that the share must not constitute too large a proportion of the total portfolio.
Key Performance Indicator:
- Increasing numbers of domains. (Increasing revenue)
- The opportunity to raise prices is similar to inflation.
- Renew contracts.
- Continuing repurchase of shares
- A Net debt/EBITDA below 3,5
Company Information
Name: VeriSign INC
Exchange Code: VRSN
Market Value $: 18.386,86 MM
Sector & Industry
Sector: Technology
Industry: Software - Infrastructure
Price Information Price
Price Target: 269
P/E: 24,69
Moat: Wide
Comments