What’s Driving The Rally In Verisign’s Stock?

by Trefis Team
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Verisign (NASDAQ: VRSN) is a global provider of domain name registry services and internet infrastructure, and enables internet navigation across the globe. Although the company is a part of the IT industry, its unique business model separates Verisign from other companies in the industry. 2019 has been an exceptional year for Verisign with its stock gaining almost 50% from the beginning of the year even in the absence of clear catalysts.

In the interactive dashboard Why Has Verisign’s Stock Outperformed In 2019? Trefis analyzes why Verisign stock has outperformed the market, and also captures likely future trends. In addition, here is more Trefis Internet and software company data.

How Does Verisign’s Stock Performance Compare With The S&P 500 In 2019?

  • Verisign’s stock price has increased from $145 at the beginning of the year to more than $215. This translates to a growth of roughly 50%.
  • This is significant, given the fact that the S&P 500 index has grown less than 20% in 2019 – increasing from $2,477 at the beginning of the year to about $2,940 by the end of June

What has helped Verisign achieve steady revenue growth over recent quarters?

  • Verisign has seen a steady growth in revenues over the last five quarters, increasing from less than $300 million in Q1 2018 to more than $306 million in Q1 2019.
  • Higher revenue has been mainly driven by an increase in the domain name base for .com and the increase in the .net domain name registration fees.
  • It should be noted that Verisign owns exclusive rights to the registry of .com and .net Internet domain names.
  • Verisign entered into Amendment 35 to the Cooperative Agreement late last year, allowing it to engage with ICANN to amend the COM Agreement and to raise .com registration and renewal prices 7% in the latter four years of each six-year period. This is helping the company charge a higher price for its products and, in turn, aiding its margin growth.
  • This monopolistic quality inherent in the domain registration process has allowed Verisign to see an expansion in revenues and profitability.

How have Verisign’s expenses trended over recent quarters?

  • Verisign’s total operating expenses have trended lower over the recent quarter, declining from $119 million in Q4 2017 to about $113 million in Q4 2018.
  • Expenses fell 7% year-over-year to $106 million in Q1 2019 primarily driven by lower sales and marketing expenses.

How has Verisign’s profitability changed over recent quarters?

  • Verisign’s net margin has increased from 44% in Q1 2018 to more than 53% in Q1 2019 driven by a combination of strong revenue growth and lower operating expenses.
  • This has helped Verisign’s EPS increase from $1.09 in Q1 2018 to about $1.35 in Q1 2019. The figure received a boost in Q4 2018 from one-time gains linked to the sale of a unit.

What is the outlook for Verisign’s revenues and profits in 2019?

  • Verisign has added more than 10 million domain names in the last 3 years, growing at an average rate of 3.7%.We forecast the domain name base to grow in the low single-digit range in the near term mainly due to a strong internet adoption rate, global economic growth, increasing e-commerce activity, and registrar go-to-market strategies.
  • Moreover, in Q1 2019, there were about 352 million domain name registrations across all top level domains – an increase of 3.1 million domain name registrations compared to Q4 2018. Current internet penetration stands at roughly 50% of the total population and this figure will only grow with time. This should help Verisign achieve steady growth over the subsequent quarters.
  • Strong revenue growth coupled with improving operating leverage should help Verisign’s operating margin cross 64% in 2019.

Estimating Verisign’s Fair Value

  • We are valuing the company at about 32x projected FY’19 EPS – similar to its current trading multiple of 31x, but significantly higher than the industry-average trading multiple of 22x.
  • Based on our forecast, Verisign’s adjusted EPS for fiscal 2019 is likely to be around $5.36. Using this figure with our estimated P/E ratio of 32x, this works out to a price estimate of $172 for Verisign’s shares, which is around 20% behind the current market price.

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