Is Verisign a Buying Opportunity?

Verisign, Inc. (NASDAQ:VRSN)’s stock dropped about 15% on October 26th after the company said that the U.S. Department of Commerce may subject a registry agreement for the .com domain to further review. The DOC, according to the company’s quarterly report, appears concerned about the agreement’s pricing terms. Since the market had been expecting that the registry services company would get approval from the federal government fairly quickly, and any changes to pricing would hurt Verisign going forward, the news sent the stock down despite fairly good quarterly numbers.

The company’s revenue for the third quarter came in 13% higher than in the same period in 2011. All four of its geographic regions- the U.S., EMEA, APAC, and other countries such as Canada and Latin American countries- experienced growth. Operating costs were flat, helping drive net income up 39%. With Verisign, Inc. doing much better in the first half of 2012 compared to last year, earnings per share in the first nine months were $1.30 versus 53 cents in EPS a year earlier.

At its current market cap of $6.1 billion, Verisign’s historical results place its valuation at 24 times trailing earnings. Sell-side analysts had expected continued earnings growth in 2013, with forward consensus for EPS coming in 15% above what they expect for this full year. It’s clear then why the DOC news is so concerning; the company’s valuation depends on continued growth and this may be threatened if it has to alter its pricing. Even after the decline in the stock price, and before analysts have had much time to adjust their projections, the forward P/E is 18. If the company can continue double-digit earnings growth, that’s probably about a fair price; if not, and particularly if it cannot hit the targets for next year, it could prove to still be overvalued.

John-Griffin2-e1353509650950

Billionaire Stephen Mandel’s Lone Pine Capital had reported a position of 8.6 million shares in Verisign, Inc.- 5.5% of the shares outstanding- in a 13G in early September (read more about Lone Pine’s buy). According to our database of 13F filings, the fund had not owned any shares at the end of June. Blue Ridge Capital and Coatue Management, two other funds managed by Tiger Cubs (John Griffin and Philippe Laffont, respectively), were shareholders at the end of the second quarter. According to their 13Fs, Blue Ridge owned 6.2 million shares and Coatue owned 1.3 million shares. Find more stocks owned by Blue Ridge Capital and by Coatue Management.

Verisign’s peers include software development company Oracle Corporation (NASDAQ:ORCL), whose Java software is used on many Internet platforms, networking technology company F5 Networks, Inc. (NASDAQ:FFIV), and infrastructure software companies Red Hat, Inc. (NYSE:RHT) and SolarWinds Inc (NYSE:SWI). Red Hat and SolarWinds are highly valued relative to the rest of these companies: their forward P/E multiples are in the 30s. In addition, these forward multiples are based on strong earnings growth- the trailing P/Es are considerably higher- even though in their most recent quarter Red Hat’s net income was actually down and SolarWinds’ growth was only moderate. Even with Verisign’s issues, it should stay a better business than either of these companies.

F5 Networks trades at 24 times trailing earnings, placing it even with Verisign on that basis. Its revenue was up in the fourth fiscal quarter- which ended in September- versus a year earlier, but earnings were flat. Like at these other companies, Wall Street analysts are optimistic and the forward P/E is 14; like in the cases of the peers we’ve discussed, we think that Verisign would make a better investment. Oracle, however, looks a lot like a value stock. Its most recent quarter saw 11% earnings growth compared to the same period in the previous year, and yet its trailing P/E of 15 is well below these comparable companies.

With expected growth bringing its pricing down to only 11 times forward earnings estimates and a five-year PEG ratio of 1, Oracle is an attractive investment. Verisign doesn’t look particularly expensive compared to its other peers, though it does depend on good earnings growth to justify its valuation.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!