How Did VeriSign Manage 150%+ Stock Price Growth In Last 3 Years With Very Little Revenue Growth?

Prior to the pandemic, VeriSign’s stock (NASDAQ:VRSN) had returned a whopping 150% for its shareholders within a span of 3 years! That’s a lot to celebrate about. But how did the company accomplish this? For starters, it did something fundamentally right. Besides modest revenue growth, it expanded its already healthy net margins by a significant 30%. But that’s not all – its P/E ratio saw a huge 100% increase during this timeframe, suggesting that investors rewarded something more than ‘a more efficient operating model.’ So what was it? It was VeriSign’s renewed agreement that secures its market position in domain name registry and unlike the previous agreement, allows it to raise prices. Our dashboard Why VeriSign stock is up 153.3% between 2016 and 2019 even though revenue increased 7.8% ? summarizes key factors that drove VeriSign’s stock over the past 3 years.   

VeriSign Became Much More Profitable In Last 3 Years

VeriSign’s earnings per share (EPS) expanded 25% between 2016 and 2019. This can largely be attributed to its net margin increasing from nearly 39% in 2016 to almost 50% in 2019. A closer look indicates a more efficient operating model. The company has been able to bring down its cost of revenue (as % of revenue) from 17.4% to 14.7%. In addition, it is now spending less on marketing as % of revenue than it did 3 years ago. It has also managed to keep R&D expenditure under control. In fact, its operating costs have declined by nearly $30 million despite almost a $90 million revenue increase.

Investors Loved A More Efficient VeriSign, But They Loved Its Advantage Even More

VeriSign’s P/E doubled from 18.5 at the end of 2016 to 37 at the end of 2019, showing a consistent increase. While increasing operational efficiency is partially the reason  – VeriSign’s renewed agreement could be another key factor that investors rewarded significantly.

VeriSign has a strong advantage in the form of exclusive rights to .com and .net domains which have a combined market share of 44%. The company gets exclusive rights to be a registry for these domains from ICANN (Internet Corporation for Assigned Names and Numbers). Usually, these rights get renewed at the end of the period if VeriSign holds up to its end of the bargain in terms of service levels. The new .com agreement, that will last until November 2024, allows VeriSign to increase prices 7% annually, unlike the previous agreement where a price freeze was implemented. This has a dual effect. First, a big chunk of VeriSign’s revenue comes from renewals and periodic price increases will virtually assure it revenue growth. Second, this competitive advantage potentially allows it to rationalize costs, such as reducing marketing expense, and become even more profitable.

Even though VeriSign has decided to freeze its prices for 2020 given the current COVID-19 situation, we believe that it is well positioned to cash in its competitive advantage as the situation improves. With this pricing decision, it can continue to acquire new customers as well as retain the existing ones. This was visible in its Q1 2020 earnings when it processed 10 million new domain name registrations. These new customers become cash cows for the future when VeriSign raises prices.

However, VeriSign isn’t the only one benefiting from a leaner operating model. Here is another company that will surprise you. Find out  how this company managed 75% stock price growth despite a significant revenue decline 

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