Despite Demand Growth, Profitability Woes Could Drag Verisign Stock Down 15%

by Trefis Team
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VRSN
VeriSign
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Verisign stock (NASDAQ: VRSN) is up just 4% since the beginning of 2021, but at the current price near $221 per share, we believe that Verisign stock has over 15% potential downside.

Why is that? Our belief stems from the fact that Verisign stock is up more than 40% from the low seen in March 2020. Further, after posting mixed Q1 ’21 numbers, it’s clear that Verisign has not benefited from the pandemic. Our dashboard What Factors Drove 93% Change In Verisign Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Verisign stock’s rise since late 2017 came due to a 9% rise in revenues, from $1.17 billion in FY 2017 to $1.27 billion in FY 2020. Net margins rose from 39% to 64% over this period, and despite a 15% rise in the outstanding share count, EPS (earnings-per-share) rose from $4.56 in 2017 to $7.08 in 2020.

Verisign’s P/E (price-to-earnings) ratio rose from 25x in 2017 to 31x by 2020 end, and currently trades around the same level. However, given Verisign’s mixed Q1 2021 results, there is possible downside risk for Verisign’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of coronavirus saw a rise in online activity, driving businesses to either shift online entirely, or develop some sort of an online presence. Verisign sells domain names on a subscription basis, and its revenues have benefited from the pandemic. This is evident from Verisign’s Q1 2021 results, where revenue came in at $324 million, up from $313 million in Q1 2020. However, the company wasn’t able to control expenses and pre-tax income actually fell from $191 million to $188 million. EPS fell to $1.33 from $2.87 but that was largely due to a $38 million tax expense in Q1 2021 vs a $143 million tax benefit in Q1 2020. However, the drop in pre-tax income is concerning.

Additionally, despite the lockdowns being lifted, we believe the company will continue seeing steady revenue growth in the medium term, as domain subscription growth is expected to stay strong, but if Verisign is unable to control expenses, profitability could drop further in the medium term. We believe the stock will see its P/E multiple decline from the current level of 31x to around 28x, which combined with a reduction in margins, could result in the stock price shrinking to as low as $185 in the near term, a downside of more than 15% from the current price of $221.

 

While Verisign stock may be fully valued, it is helpful to know how its peers stack up. Verisign Stock Comparison With Peers summarizes how Verisign compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

 

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