Analysts Unmoved By Verisign's .com Victory

Thursday was a big day for VeriSign (VRSN), which has a monopoly running the database of Web site addresses ending in .com. Companies pay Verisign a fee each time they have to stick a new name in that database, and yesterday the U.S. Department of Commerce told the company it can hold onto that monopoly for years, VeriSign said in a statement, eliminating the threat of imminent competition, which had pushed Verisign shares to a low of $15.95 back in August.

With a business hinged to the increase in domain names, you’d think this would be great news for VeriSign.

But two analysts who went in opposite directions on the stock are pretty much in agreement that Verisign’s good news is not that exciting for the stock:

• Gregg Moskowitz, who follows the company for Susquehanna Financial in New York, says that at a recent price of $26, after a 26% rise in recent weeks, VeriSign shares fully reflect any payoff Verisign may get from the new lease on its monopoly, and he downgraded the stock from Positive to Neutral. As he told me in a telephone chat, “I’m very mindful of a significant run-up in the stock over the past few days. The shares now reflect to a large extent the upside they can get from a revenue and profit standpoint from the DotCom agreement. Getting DotCom approval is a huge win, but the fact of the matter is that based on their business model, with revenue being ratable in terms of domain name registration, and with their having to get 180 days notice before they increase prices, there’s not going to be much upside from here regardless of how popular domain names are in 2007.”

  Referring to pricing, Moskowitz says with its monopoly, VeriSign will raise prices, but that the increase from $6 for each new Web address in the database to $6.42, won’t come until 2008 and is so minimal as to offer negligable financial upside for the company. Trading at 19x his estimate of $1.37 in profit per share for 2008, and an enterprise-value-to-free-cash-flow multiple of 16-17x, Moskowitz thinks the shares are fairly valued at the current price.

• Albert Lin of American Technology Research, upgraded the stock from Sell to Neutral, but he’s also umimpressed with yesterday’s development. While the Commerce Dept. deal erases Lin’s bearish concerns, he says that judging by multiples applied to the businesses of other Internet companies like Google (GOOG), VeriSign’s monopoly is worth $17 a share at best, and the rest of the biz doesn’t add much to that: If

  Valuation for dotcom comes in between $9/share to $25/share for an average of $17/share […] If we assume that the dotcom monopoly is the very best kind of business in the whole world (it may be close if not the best), then the multiple applied to the sales and earnings should reflect the highest in the marketplace. Akamai (AKAM) trades at a 15X price to sales while Google trades at 13.7X net sales (10X gross sales). The VRSN dotcom business at 15X sales would be worth $9/share alone. Using an earning’s multiple, AKAM trades at 41X pro-forma earnings. Google has a P/E (pro-forma) of 34X. Using a 41X P/E on our dotcom contract value of $150MM of net income gives about $25/share in stock value. The range seems almost too huge to be useful and we are sure there will be great reasons given as to why the dotcom deal cannot match the dominance and growth rates of GOOG or AKAM, but our point is to illustrate just how much value in VRSN comes from the dotcom business.

  Valuation of remaining business around $5 to $7 a share […]

  Almost all the economic benefit to shareholders in our analysis comes from the dotcom agreement. For now, we simply take the 20% of the net income not attributed directly to the dotcom deal and assign it a 20X P/E for just under $5 of value ($1.6BB of revenue minus $384MM of revenue for the dotcom business gives $1.22BB of revenue with $58MM of Net Income not accounted for by the dotcom business. $58MM with 242MM shares out gives $0.24 cents of EPS times 20X P/E is $4.80 of share value). We understand that such a multiple may seem high for a shrinking business, but we assume the overall chances to improve these … lines of business are taking place A P/E of 30X would give about $7/share in value.

Not all monopolies are created equal, I guess, and VeriSign will have to do more with the vast majority of its sales that come from things other than Web addresses, such as telephone-number lookup.

Comments

[Kris Tuttle:]

The company is also pretty poorly managed and their customer service and support infrastructure seems very outdated. Maybe it makes the company a more attractive acquisition candidate but the current management team seems to lack vision and focused execution.

2006 Dec 04 02:38 PM