We think that Verisign Inc. (NASDAQ:VRSN) currently is a better pick compared to NetApp Inc. (NASDAQ:NTAP). Verisign stock trades at about 20.5x trailing revenues, much higher than NTAP, whose P/S multiple stands at 3.2x. Does this gap in the companies’ valuations make sense? We believe so, and we only expect this gap to widen. While both companies have seen a strong rise in revenues since the lockdowns started being lifted, Verisign has seen much steadier growth over the past few years, and we expect Verisign to continue seeing more consistent revenue growth than NetApp. Verisign trades at a higher P/EBIT of 31.6x against NTAP’s 15.3x but has also seen faster EBIT margin growth lately. Additionally, Verisign is in a better debt position and has a stronger cash cushion.
Having said that, we dive deeper into the comparison, which makes Verisign a better bet than NetApp, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard Verisign vs NetApp: Sector Peers, But Verisign Inc. Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. NetApp Seeing Faster Revenue Growth Lately, But Verisign Has Been More Consistent
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NetApp’s revenues suffered in FY’20 due to the pandemic, dropping from $6.1 billion in FY ’19 to $5.4 billion in FY ’20, but sales have started recovering since. NetApp’s sales rose from $5.4 billion in FY ’20 to $5.7 billion in FY ’21 (NetApp’s fiscal year ends in April), and currently stand at $6 billion on an LTM basis.
Verisign saw 2.7% sales growth during the pandemic, as compared to -11.9% for NetApp. Further, VRSN’s pre-pandemic sales growth stood at 2.6% vs NetApp’s -3.4%. However, for the most recent quarter, NTAP has seen faster growth of 7.4% QoQ and 10.6% YoY, vs VRSN which saw a growth of 1.5% QoQ and 5.1% YoY.
While NetApp ($6 billion LTM sales) is a larger company than VRSN on the basis of sales ($1.3 billion LTM sales), Verisign has seen more consistent revenue growth than NetApp over the years.
2. EBIT margins: A Mixed Bag; But Verisign Is In A Much Better Cash Position
Verisign’s P/EBIT ratio stands at 31.6x currently, much higher than NTAP’s 15.3x. While Verisign’s LTM EBIT margins currently stand at a strong 64.9%, much higher than NetApp’s 20.8%, NetApp is ahead in terms of LTM change compared to the last three fiscal years, with 2.3% growth vs Verisign’s -3.4%.
Looking at both companies’ cash position, Verisign’s debt as a % of equity stands at 0.0%, compared to that of NetApp’s 13.6%. Additionally, Verisign’s cash as a % of assets stands at 66%, more than that of NetApp’s 49.3%.
3. Verisign Ahead In Terms Of Expected Returns
Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Verisign is the better choice. Verisign’s LTM revenues of $1.3 billion are expected to rise at a CAGR of 2.3% as per our estimates, taking revenue numbers three years out to as high as $1.4 billion. Assuming Verisign’s P/S ratio to pull back slightly to around 19x from the current 20.5x, this still means that market cap would pull back marginally to $27 billion.
In comparison, given historical trends, we expect NetApp’s sales to rise at a CAGR of just 1.9%, taking revenue in three years to $6.4 billion. Considering the P/S for NetApp to also pull back slightly to 2.8x, we estimate a market cap of $18 billion for NetApp, indicating a downside of around 8%.
However, these are both conservative cases and given Verisign’s consistency in terms of revenue and margins, the stock has a better chance of outperformance.
The Net of It All
Despite NetApp’s revenues being larger than that of Verisign, the latter has seen stronger EBIT margin growth and steadier revenue growth along with being in a better financial position. However, our comparison of the post-Covid recovery above, shows that NetApp has shown a much stronger growth than Verisign. Despite that, Verisign’s more consistent performance over the past 4-5 years, warrants a higher multiple than NetApp and we believe that this gap in valuation could widen further. As such, we believe that Verisign stock is currently a better bet compared to NetApp stock.
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|S&P 500 Return||-3%||21%||103%|
|Trefis MS Portfolio Return||-1%||42%||282%|
 Month-to-date and year-to-date as of 12/20/2021
 Cumulative total returns since 2017