Further Upside For Verisign Stock?

VRSN: Verisign CA logo
Verisign CA

Despite an almost 40% rise since the March lows of this year, at the current price around $210 per share, we believe Verisign stock (NASDAQ: VRSN) is still a good opportunity for investors. VRSN stock has increased from $151 to $210 off the recent bottom, less than the S&P which increased by 55% from its recent lows. However, the stock is up only 9% from the level it was at the start of the year, and has not yet touched its pre-Covid (February 2020) high of $215. We believe that VRSN’s stock could set fresh highs, rising around 15% from its current level, driven by expectations of rising demand and strong Q2 2020 results. Our dashboard What Factors Drove 83% Change In Verisign Stock Between 2017 And Now? has the underlying numbers behind our thinking.

The sharp stock price rise since 2017 end was helped by a 6% rise in revenue, which translated into a 34% jump in net income, as operating expenses dropped as a % of revenue. Verisign’s cost-cutting initiatives saw operating margins jump from 60.7% in 2017 to 65.4% in 2019. On a per share basis, earnings rose from $4.56 in 2017 to $5.17 in 2019.

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Verisign’s P/E multiple rose from 25x at the end of 2017 to 37x by the end of 2019, mainly due to Verisign’s high margins and steady margin growth which led to a rise in investor expectations. The P/E multiple has risen further to 40x so far this year. We believe that the company’s P/E ratio has the potential to see a further increase in the near term on expectations of continuing demand growth and favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 have led to a rise in online presence for both businesses and individuals. Verisign’s revenues come solely from web domain sales and subscriptions and the past six months have seen a jump in online blog and business registrations. This is evident from Verisign’s strong Q2 earnings, with revenue at $314 million vs $306 million for the same period in 2019, a 3% jump. With no changes in operating margins and the effective tax rate, EPS saw marginal growth from $1.24 to $1.32. Additionally, even with the lockdowns being lifted, working online from home will gradually become the new norm, and this will help further drive demand for web domain names as more and more people shift their businesses online.

These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Verisign’s stock can rise a further 15% from current levels, to set fresh highs over $240.

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