Down 15% This Year Is Verisign Stock A Better Pick Over F5 Networks?

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Given its better prospects, we believe Verisign stock (NASDAQ: VRSN), a domain name provider, is a better pick than its industry peer, F5 Networks stock (NASDAQ: FFIV), an application security and cloud networking company. Investors have assigned a higher valuation multiple of 11.6x revenues for Verisign, compared to 3.7x revenues for F5, due to Verisign’s superior profitability and solid financial position. In the sections below, we discuss why we believe that VRSN will offer better returns than FFIV in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of F5 vs. VerisignWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Both FFIV And VRSN Underperformed The Broader Markets

FFIV stock has seen little change, moving slightly from levels of $175 in early January 2021 to $173 now, while VRSN stock has seen a decline of 20% from levels of $215 to $175 over this period. This compares with an increase of about 40% for the S&P 500. Overall, the performance of FFIV and VRSN stocks with respect to the index has been lackluster. Returns for FFIV stock were 39% in 2021, -41% in 2022, and 25% in 2023, while that for VRSN were 17%, -19%, and 0%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that FFIV underperformed the S&P in 2022, while VRSN underperformed the S&P in 2021 and 2023.

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In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could FFIV and VRSN see a strong jump? While we think both stocks may see higher levels, VRSN will likely outperform FFIV in the next three years.

2. F5’s Revenue Growth Is Slightly Better

F5’s revenue growth has been better, with a 6.2% average annual growth rate in the last three years, compared to 5.7% for Verisign. F5’s revenues rose from $2.4 billion in fiscal 2020 (fiscal ends in September) to $2.8 billion in 2023, led by services and product revenue growth due to increasing demand and entry into new markets.

For Verisign, revenue increased from $1.26 billion in 2020 to $1.49 billion in 2023, driven by higher demand for domain names. The company benefited from increased demand for domain names, as more businesses expand their presence online. Price increases have also bolstered the company’s top-line growth, and this trend is expected to continue in the near term.

If we look at the last twelve-month period revenues, Verisign fares better with sales growth of 4.9% vs. 3.6% for F5. Our F5 Revenue Comparison and Verisign Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, we expect F5 to see better sales growth than Verisign. F5’s top-line is likely to expand at a CAGR of 3% to $3 billion in three years, while Verisign will likely see its sales rise at a 2% average annual growth rate to a little over $1.6 billion over this period.

3. F5 Is More Profitable

F5’s operating margin improved from 17.1% in 2020 to 19.1% in 2023, while Verisign’s operating margin expanded from 65.2% to 67.0% in 2023. Looking at the last twelve-month period, Verisign’s operating margin of 67.3% fares far better than 21.8% for F5. The latter’s margin metric has been weighed down lately due to a rise in component costs.

Looking at financial risk, both are comparable. F5’s 2.6% debt as a percentage of equity is lower than 10% for Verisign. However, Verisign’s 57cash as a percentage of assets is much higher than 26% for F5, implying that F5 has a better debt position and Verisign has more cash cushion.

4. The Net of It All

  • We see that F5 has seen slightly better revenue growth and has a better debt position. On the other hand, Verisign is far more profitable and has more cash cushion.
  • Now, looking at prospects using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Verisign will offer higher returns in the next three years.
  • If we compare the current valuation multiples to the historical averages, VRSN fares better. F5 stock is trading at 3.7x revenues, compared to its last five-year average of 4.1x. In contrast, VRSN stock trades at 11.8x revenues, vs. the last five-year average of 16.2x.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 18% for VRSN over this period vs. an 8% expected return for F5, based on Trefis Machine Learning analysis – F5 vs. Verisign – which also provides more details on how we arrive at these numbers.

While VRSN stock may outperform FFIV, it is helpful to see how F5’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 FFIV Return 5% -3% 20%
 VRSN Return 3% -15% 130%
 S&P 500 Return 6% 12% 138%
 Trefis Reinforced Value Portfolio 7% 7% 659%

[1] Returns as of 5/23/2024
[2] Cumulative total returns since the end of 2016

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