Steady Revenue Growth Could Drive Verisign Stock Back To Late-2020 Highs

by Trefis Team
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VRSN
VeriSign
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Despite already rising more than 25% from its low in March 2020, at the current price of $191 per share, we believe Verisign stock (NASDAQ: VRSN) has further upside potential. Verisign stock has increased from $151 to $191 off the 2020 bottom, much less than the S&P which increased by almost 80% from its lows. Further, the stock is down around 10% from the level it was at before the pandemic. We believe that Verisign stock could rise more than 15% to its late-2020 high of $220, driven by expectations of continued strong demand and strong full-year 2020 results despite the pandemic. Our dashboard What Factors Drove 67% Change In Verisign Stock Between 2017 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2017-end came due to a 4% rise in revenue from $1.21 billion in FY 2018 to $1.26 billion in FY 2020. Net margins rose from 47.9% to 64.4% over this period, and despite a 1% rise in the outstanding share count, EPS jumped 38% from $5.13 in 2018 to $7.08 in 2020.

Verisign’s P/E (price-to-earnings) multiple rose from 22x in 2017 to 30x by 2020 end, but has since dropped to 27x. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus saw a rise in online activity, driving businesses to either shift online, or develop some sort of an online presence. Verisign, a company that sells domain names on a subscription basis, has thus benefited from the pandemic. This is evident from Verisign’s full-year 2020 results, where revenue came in at $1.26 billion, up from $1.23 billion in 2019. Further, the company managed to control expenses in line with revenue growth, and operating margins remained flat at around 65%. EPS jumped from $5.17 to $7.08, but this was largely due to a one-time tax benefit of $64 million vs a tax expense of $146 million in 2019.

Additionally, despite the lockdowns being lifted, we believe the company will continue seeing strong revenue growth in the medium term, as domain subscription growth is expected to remain strong, and if Verisign manages to continue controlling expenses, profitability could rise even further. This will additionally raise investor expectations, driving up the company’s P/E multiple. We believe that Verisign stock can rise more than 15% from current levels, to regain its recent highs around $220.

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