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Should I Buy VeriSign Stock? 3 Pros, 3 Cons

Solid growth and share buybacks bode well, but the valuation looks full

   

VeriSign (VRSN) is one of those companies that lots of people have heard of but few know what it does. But once you discover VeriSign’s central position on the ever-expanding web, well … you’d probably figure it has a license to print money.

VeriSign enjoys exclusive rights to register any Internet domain name ending in .com or .net (among others.) That means that anytime anyone registers or renews a URL ending in .com or .net, VeriSign collects a fee.

The company receives $7.85 per .com name and $5.11 for every name ending in .net. With the total number of global Internet domain names expected to double to 500 million before the end of the decade, it’s easy to assume that VRSN is a slam-dunk of a stock.

Alas, it’s not that simple. (Is it ever?)

To help decide whether VeriSign is a “buy,” “hold” or “sell” at current levels, let’s take a look at some of the pros and cons:

Pros

Solid Growth: As fast as the web is growing — thanks partly to the explosion of the mobile web — much of the expansion in domain names is not coming from .com and .net. Indeed, market share for .com and .net, which peaked at 53% just a few years ago, is in decline, hitting 48% last year. It’s expected to drop to 40% by 2020. But just because there’s no gusher of growth doesn’t mean VeriSign’s opportunity is trivial. The company should be able to compound high-single-digit to low-double-digit percent growth rates at least through the end of the decade.

Margin Expansion: Although domain names are hardly the gold rush they once were, VeriSign makes the most of modest growth by wringing ever-increasing amounts of profit from revenue. The margins in this business are fat and expanding. VRSN’s operating margin stands at 55% and its net profit margin comes to 38%. More importantly, those margins are getting wider. In the most recent quarter, operating margin increased by more than 5 percentage points, while net margin expanded by more than 3 percentage points.

Share Buybacks: VeriSign doesn’t pay a dividend, but it is committed to returning cash to shareholders. The company repurchased roughly 7 million shares in the most recent quarter for $334 million. Even better, the board of directors just approved an additional $519 million to buy back yet more stock. That brings the total authorization under the buyback program to $1 billion. Not bad for a company with a total market value of $7 billion.

Cons

Valuation: Shares in VeriSign are up 25% for the year-to-date, outperforming the broader market by 5 percentage points. Although investors have to be happy with those gains, the run-up has made the stock less enticing for new money. That’s because shares look to be trading at fair value. No, the stock is not expensive, but by no means is it a screaming bargain either. The forward price-to-earnings multiple of 19 is equal to the stock’s own five-year average, according to data from Thomson Reuters Stock Reports.

Volatility: Anytime a stock price swings dramatically and frequently, it increases the risk that you will buy high and sell low. That’s why volatility is often used as a proxy for risk. Over the longer run, VRSN hasn’t been much more volatile than the broader market, posting a beta of a bit more than 1. More recently, however, the share price has been all over the place. In just the last year, the stock has been as high as $50 and as low as $33. Put another way, over the last 52 weeks, the stock has swung in a range of nearly 35 percentage points.

Short Sellers: A big factor contributing to all that volatility is the fact that a lot of professionals are betting that VeriSign’s stock will fall. At nearly 15%, the percentage of shares sold short is relatively high. More worrisome is that short interest has been trending higher. Indeed, shares sold short have nearly doubled so far in 2013, to 20 million. True, heavy short interest sets you up for a nice pop anytime better-than-expected news touches off a squeeze. But that’s a play for traders, not long-term investors — and they should be at least a little bit concerned that so many speculators are betting on a fall.

Bottom Line

So should you buy VeriSign? No — I hate to be wishy-washy on this name, but given the valuation and the fact that the buyback and margin expansion look to be baked into the stock price, VeriSign is a “hold” at current levels. I wouldn’t bail out, but neither would I commit new money. Wait for a better entry point.

As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/should-i-buy-verisign-stock/.

©2014 InvestorPlace Media, LLC

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