Drop In VeriSign Shares Highlights Risks Associated With Domain Business

| About: VeriSign, Inc. (VRSN)

Shares of VeriSign (NASDAQ:VRSN) dropped 6% on Tuesday, March 18, after the U.S. National Telecommunications & Information Admisnistration (NTIA), an agency of the U.S. Department of Commerce (DoC), announced its intent to transition key internet domain name functions. In essence, the U.S. DoC would be giving up its control on certain functions of the NTIA, which handles registrations of domain names. The sell-off post the announcement was a result of the market’s uncertainty in VeriSign renewing its .com and .net contracts. VeriSign’s contracts with the DoC on the .com and .net domain name registrations expire in 2018.

Immediately after the news release, VeriSign released a press statement indicating that the change in control of regulating the domain name registry market from NTIA does not impact its renewal of the .com and .net domains when they expire in 2018. The company stated that the NTIA announcement includes Internet functions that are entirely different from those VeriSign performs under its .com/.net agreements. Moreover, the company stated it has been performing the said functions being transferred without compensation at the request of the DoC, as a community service under a Cooperative Agreement.

The drop in VeriSign’s stock price highlights risks involved with the company’s business, should it lose either of its .com/.net contracts. We have a Trefis price estimate of $61 for VeriSign which stands at an 18% premium to its current market price of $52.

How Will Losing The .com/.net Contract Impact VeriSign?

VeriSign is the sole registrar for the .com/.net domain names, and had a market share of approximately 46.7% in global top level domain name registrations in 2013. At the end of Q3FY13, VeriSign had a total of 126 million .com and .net domain names registered in the adjusted zone out of a total 265 million domain names registered globally. Losing the contract for either of these domain names come 2018 would mean a severe cut in the company’s top line. You can take a look at the impact a loss in contract to another registry service provider such as Neustar on VeriSign’s stock by changing its share of all domain registrations worldwide.

Currently, we believe the only threat to VeriSign’s market share in the global domain name registrations market is from country code top level domain names (ccTLDs). ccTLD registrations reached 119.5 million at the end of Q3FY13 and have been increasing at almost three times the growth rate in .com/.net domain names. This rapid increase in ccTLD registrations, combined with restrictions on domain name pricing, have strained top line growth for VeriSign, which fell to 10.5% in 2013 from 13% in 2012. We expect VeriSign’s market share to decline gradually until the end of our review period as ccTLD registrations continue to grab potential .com/.net registrants.

Disclosure: No positions.