Domain Price Inflation Could Hurt VeriSign’s Stock

| About: VeriSign, Inc. (VRSN)

VeriSign (NASDAQ:VRSN) holds exclusive rights to and .net Internet domain names, which account for about half of all domain name registrations. The company recently announced that it was raising its prices for .com and .net registrations.

We don’t think these price hikes are sustainable. Based on VeriSign’s second-quarter results and the recent strategic sale of its SSL and authentication business to Symantec (NASDAQ:SYMC), we have reduced the Trefis price estimate for VeriSign’s stock from $35.73 to $35.28.

However, there could be a 20% upside for the stock if the price increases continue at a rate that exceeds our expectations. Our analysis follows below.

Domain Name Price Increases

The average price that VeriSign charges to register a domain name has risen by roughly 3% a year on average in recent years, from about $6 in 2007 to around $6.40 in 2009. We expect registration prices to increase at an average annual rate of 4% during the Trefis forecast period, reaching $8.20 by 2016.

VeriSign recently raised its .com registration price by 8%, from $6.80 to $7.34. The .net registration price went up by 10%, from $4.23 to $4.65. We find these price increases aggressive and potentially unsustainable. Although we expect the overall proportion of .com and .net domains to remain constant in the short term, higher prices could limit their popularity in the long term.

You can drag the trend-line in the chart below to create your own domain registration fee forecast for VeriSign and see how it impacts the company’s stock price.

In the event that VeriSign’s registration price growth exceeds our expectations, reaching an average price of $10.80 by 2016, there could be an upside of 20% to the $35 Trefis price estimate for Verisign’s stock.

The Decline of .com and .net

The total proportion of .com and .net domain names fell from 52.5% in 2007 to around 50% in 2009, as country-specific domains (such as .cn, .uk and .de) grew in popularity. We expect this proportional decline to continue, reaching 44% by the end of the Trefis forecast period. The next interactive chart shows our estimate for the impact of this driver on VeriSign’s stock price. You can drag the trend-line to create your own estimate and see how it affects the company’s share value.

However, net .com and .net domain name additions have showed healthy growth recently. VeriSign registered about two million .com domains in each of the past two quarters, off a base of around 100 million registrations. We believe that this growth will help Verisign maintain its total proportion of .com and .net registrations at around 50% for 2010. As discussed, the total share of .com and .net registrations could decline in future due to price increases.

However, there could be an upside of 10% to the $35 Trefis price estimate for Verisign stock if the company manages to maintain .com and .net registrations at around 50% of total registrations over the course of our forecast period.

Disclosure: No positions