About Verisign
It is safe to say that if the internet goes down for more than two seconds, people will absolutely lose their minds.
This goes to show that what Verisign does is akin to the core concept of insurance; you don’t miss it or think about it when things are going well but when you find yourself in a pickle and find yourself needing it, you’re willing to do next to anything to get it back and all of the sudden you miss it ever so dearly.
Needless to say, Verisign serves an extraordinarily important role in one of the world’s most prized possessions, the internet.
TD Ameritrade’s platform describes the company as a “global provider of domain name registry services and Internet infrastructure,” and goes onto mention that “the Company enables the security, stability, and resiliency of Internet infrastructure and services, including providing root zone maintainer services, operating two global Internet root servers, and providing registration services and authoritative resolution for the .com and .net top-level domains, which support the majority of global e-commerce.”
Lastly, we think it is important to add that Verisign also “operates the authoritative directory of and/or the back-end systems for all .com, .net, .cc, .gov, .edu and .name domain names, among others.”
We couldn’t have said it better ourselves.
Literally.
Nevertheless, it is frighteningly difficult to imagine a world in which there’s an internet but no Verisign.
This being the case, let’s just call Verisign what it is and what others call it as well; a monopoly.
While there are certain potential negative implications of this from a societal standpoint, this isn’t necessarily a bad thing if you’re a prospective or current investor in the company’s shares.
Additionally, we were initially attracted by Verisign’s cybersecurity-related capabilities, as we have discussed in previous stock analysis articles that we think cybersecurity is both the present and the future.
Alright, so Verisign is a huge internet behemoth that is tasked in many regards with keeping the internet intact and also generates a sizable amount of revenue from its domain registration-related offerings.
Briefly before digging into the company’s financials, it’s a fair evaluation to say that Verisign’s business model is overwhelmingly recession proof, as we don’t see the internet or intrinsic demand for the internet going away anytime soon.
Some on the internet liken Verisign as the toll collector of the internet, as the company in recent history has generated a large bulk of its revenue by charging $7.85 each year for each .com name that is registered. It was reported from the same source that there were 127 million .com domain names registered at the time of the piece (2016).
We love this analogy.
This is another massive plus for prospective and/or current shareholders.
Let’s cut the jibber jabber and get into this company’s financials and figure out whether or not Verisign’s stock is worth buying from largely a numbers-based perspective.
Verisign’s stock financials
With a current share price of $203 along with a price-to-earnings (P/E) ratio of 27.05, no present annual dividend distributed to its shareholders and a market capitalization of $21.6 billion, Verisign’s stock seems to be a bit overpriced at the moment as indicated by the P/E ratio being modestly higher than that of fair value, which is generally accepted to be indicated by a P/E of 20, whereas anything lower than 20 implies that a stock is undervalued and if greater than 20, overvalued.
Nevertheless, if this company has some more than impressive financial firepower at its disposal, sometimes it makes sense to be willing to buy shares in a company at a slight premium.
Let’s see if this is the case with Verisign.
According to the company’s balance sheet, Verisign’s executive team is responsible for managing nearly $2 billion in total assets along with around $3.2 billion in total liabilities.
Frankly, we didn’t expect Verisign to have more total liabilities than total assets, especially given that it has been around since 1995.
Perhaps the industry that Verisign dominates isn’t as low-debt as we had initially assumed. To an extent, it makes sense that this company has a relatively large amount of total liabilities due to its vast customer reach tied with the fact that being a leader in the domain and cybersecurity spaces requires a lot of investment and reinvestment in order to merely stay relevant in the cybersphere.
Even though this is an accurate assessment of the company and the landscape it operates in, we’d still like to see the company trim down on some of its outstanding debt and other liabilities and get back to being a bit closer to becoming asset-heavy.
Usually, we would be more concerned if this was any other company, however we see Verisign as being one of the “too big to fail” companies that is simply too structurally important to fall apart and spiral down into the bankruptcy process.
All points considered, we’re not terribly worried about the company’s large amount of total liabilities at the moment but we would like to see them come down over the next few years.
Onto the company’s income statement, Verisign’s total revenue has been very, very consistent over the last five years which is to be expected if one of your primary revenue streams is to collect tolls from those registered on the internet.
Again, this is a recession proof business model from our vantage point.
Specifically, as it relates to the company’s total revenue in recent history, history itself says that you can count on Verisign generating somewhere eerily close to the neighborhood of $1.2 billion in total revenue each year (since 2017).
There isn’t much to pick apart or analyze here other than just mentioning that this company’s recession proof business model is well evidenced in the income statement, particularly through Verisign’s total revenue over the last handful of years.
From the perspective of the cash flow statement, Verisign wouldn’t dare deviate from its previous consistency, as its net income over the past five years has been positive and has seen some growth as well, standing at $457 million in 2017 and since rising to its latest reported figure (2021) of $785 million. In addition to Verisign’s growth in net income, the company also reported positive total cash from operations during the same time frame as well, which speaks to the company’s consistency once again.
For instance, the company’s total cash from operations has stayed between $698 million (2018) and $807 million (2021), which is a great sign but also to be expected for a company with the stature, reach, power and resources such as Verisign.
Verisign’s stock fundamentals
Monopoly power typically comes with great power, responsibility and profitability.
Verisign clearly has all three.
As a prime example, Verisign’s trailing twelve month (TTM) net profit margin is currently pegged at 59.05% while the industry’s average is set at 23.43%, according to TD Ameritrade’s platform.
This is as material of a difference as it gets.
As mentioned with regard to previous metrics, there isn’t really much of a reason to search for much deeper meaning behind the company’s TTM net profit margin, as they practically dominate the space(s) they operate within.
It’s still a great sign that Verisign’s net profit margin is proportionately larger than that of its competitors, again, given its scale and reach.
Furthermore and unsurprisingly, Verisign’s TTM returns on assets and investment are outlandishly higher than the competition’s averages.
For instance, the company’s TTM return on investment is 116.45% to the industry’s average of 18.95%, which is a large bridge to gap as far as competition goes.
The moat is real with Verisign.
Should you buy Verisign stock?
Clearly, it pays to be a de facto monopoly in the cybersecurity and domain registry space.
GIven the current state of the stock market and the global economy as a whole, it is our view that it can be good to go with something boring and consistent when turmoil and volatility are on the rise without an end in sight. Therefore, although we have our fair share of concerns regarding the company’s balance sheet (be it a minor concern of ours) as well as its slightly lofty valuation at the moment, this company is certainly not a “sell.”
Therefore, in the interest of staying objective and going by the numbers and other vital, relevant macroeconomic considerations, it makes the most sense to give Verisign’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.