VeriSign: Wait For A More Favorable Entry Price

Summary

• With a profit margin as high as 47%, the company is doing well. It distributes almost all its profits to shareholders through share repurchases.
• VeriSign's outlook looks good, with expected growth in domain name registrations between 0% and 2.5% for 2023. The company has also implemented price increases starting in September this year.
• Since 2018, VeriSign has been quoted at a high valuation, but this high valuation has still not straightened out. The rise in interest rates could be a possible catalyst for a reversion.
• I prefer to wait for a more favorable entry price.

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Introduction

VeriSign (NASDAQ:VRSN) may be an unknown company to many, yet it holds a large market. It provides domain name registration and Internet infrastructure services, giving people, businesses, governments and the like domain names to manage their websites.

The company appears to be doing well with a high net profit margin of up to 47%. Over the past ten years, VeriSign achieved a solid total return of 321% compared to 202% for the S&P500.

VeriSign's shares have risen rapidly, yet the company continues to perform strongly. With the price increases on their domain names, I believe revenues and profits will continue to rise for the foreseeable future. At a lower price, the stock is worth buying.

Data by YCharts

Full-Year And Fourth Quarter Earnings

VeriSign increased revenues by 7.3% year over year, and operating income increased by 8.8% during 2022. During the fourth quarter, the company saw 9.7 million new domain name registrations compared to 9.9 million last quarter and 10.6 million in the same quarter in 2021. The renewal rate for the fourth quarter will be about 73% compared to 75% in the same quarter last year, mainly due to a slowdown in China. During and shortly after the pandemic, domain name registrations grew strongly as e-commerce companies began to emerge at a rapid pace. Now, the growth in registrations is back to pre-pandemic levels.

Domain name registrations should grow between 0% and 2.5% in 2023. VeriSign is also implementing price increases of 6.7% for .com domain names, effective September 1, 2023.

VeriSign also has strong fundamentals. With $980 million in cash on the balance sheet and $1.8 billion in long-term debt, we arrive at net debt of $820 million. Free cash flow is high at a whopping $804 million in 2022, so Verisign can easily meet its obligations.

Share Repurchases

The cash flow analysis shows that the company is repurchasing shares for a significant amount. In 4 years, VeriSign has repurchased more shares than it generated in free cash flow.

Often companies buy back their own shares when they feel the stock price is undervalued relative to the company's value. The share repurchase reduces outstanding shares and the market purchase creates more demand. This is a perfect recipe for stock price growth. Also, the buyback yield of 4.8% is quite high.

VeriSign's cash flow highlights (SEC and author's own calculation)

I prefer to choose stocks that both pay dividends and buy back shares. That's because buying back shares can help the company increase the dividend per share, even at equal earnings.

The recent stock price correction makes it an interesting time to buy VeriSign cheaply, and the share buybacks could help push the stock price up.

Looking ahead, VeriSign still has some $859 million in share repurchase authorization outstanding. This represents a buyback yield of as much as 4.4%, which is quite high and beneficial to shareholders.

Valuation

Finally, the analysis of the stock's valuation follows. For this, I look first at the PE ratio and then at the EV/FCF chart. This gives a better picture of the share valuation because here cash and debt on the balance sheet are also included in the share valuation.

The PE ratio is currently quite high at 30.7, but in line with the 3-year average. We can see that the share valuation was very attractive in 2014, but shortly thereafter the price rose sharply.

Data by YCharts

3 analysts expect earnings per share to increase by more than 10% over the next few years. And this makes the forward PE ratio for 2025 only 21. This suggests that the stock is a bargain, but the PE ratio does not take into account cash and debt on the balance sheet.

VeriSign's earnings estimates (VRSN ticker page on Seeking Alpha)

The enterprise value to free cash flow ratio includes cash and debt in the valuation picture. In the below chart, we see that this ratio compares favorably with the 3-year average. Still, it's significantly higher now than in 2018.

Data by YCharts

So the forward price to earnings shows a favorable picture, but the EV/FCF ratio shows a very different picture. In general, I put the stock on hold because the stock is currently expensively valued, and only 3 analysts have made their forecasts. At a lower price, I would take a position in this strong growing and high-margin company.

Conclusion

The domain name registration market is a profitable one. This is evident from the strong numbers and high profit margin published by VeriSign. With a profit margin as high as 47%, the company is doing well. It distributes much of its profits to shareholders through share repurchases and so the buyback yield in 2022 was a whopping 4.8%, with the forward buyback yield at 4.4%.

Revenue grew steadily by as much as 7.3% in 2022, as did operating income, which grew by 8.8%. VeriSign's outlook looks good, with expected growth in domain name registrations between 0% and 2.5% for 2023. The company has also implemented price increases starting in September this year. VeriSign will continue to grow in both revenue and profit in my view.

Looking at the stock's valuation, we see an expensive one, both for the PE ratio and the EV/FCF ratio. This has been the case since 2018, and this high valuation has still not straightened out. The rise in interest rates could be a possible catalyst for a stock price correction. Looking ahead, the projected PE ratio for 2025 looks very favorable with a value of 21. Still, I prefer to wait for a more favorable entry price.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.