Should You Buy This Authoritative Registry Operator?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Do you want to own a piece of a major Internet registry operator that has the right to deliver .com and .net domains for website owners? Many investors might think now is the time to accumulate shares of VeriSign (NASDAQ: VRSN) because it has experienced a significant plunge from more than $49 per share in October to only $34.15 currently. Being investors, what should be our course of action? Let’s dig deeper.

VeriSign is the major Internet domain registry and infrastructure assurance service provider, with its exclusive registry of domain names ending in .com, .net, and .name. The majority of its revenue, around $472.7 million, or 61.2% of the total revenue, was from the US region. There is a customer concentration in its business, as one customer accounted for around 30% of the total operating revenue in 2011. Previously, VeriSign had operated .org domains as well until 2003 in exchange for the continuation of the .com domain’s operation with around 34 million registered users. As of December 2011, VeriSign had around 113.8 million users in both .com and .net registries. In July of last year, the .net operation has been renewed for the company for 6 years.

VeriSign is allowed to be the registry operator for .com domain for another six years, but the glitch is that it couldn’t raise prices automatically (of up to 7%) like before. The annual price would be the current price of $7.85 per name. With 105 million names for .com domain, it would bring to VeriSign sustainable revenue of more than $824 million. The discontinued automatic price increases had restricted VeriSign to charge as much as $10.29 by the end of the sixth year, wiping out the addition $256 million per annum from price increases. The cap on price increases precluded a free fall in the market.

Since the beginning of 2009, investors have enjoyed a gradual upward trend of its stock price. However, the recent drop has wiped out most of its gains in the last 5 years. Among its peers including Tucows (NYSEMKT: TCX), Symantec (NASDAQ: SYMC) and Innodata (NASDAQ: INOD), VeriSign hasn’t provided a great 5-year return to shareholders.

<img src="/media/images/user_14219/screen-shot-2012-12-04-at-92111-am_large.png" />

Tucows has been the best performing stock, with the gain of 92.11% over the last 5 years, whereas Innodata is the worst, creating a loss of nearly 9.4% for investors.

In terms of the profitability of shareholders’ equity, VeriSign seems to be the best, and its return on equity has skyrocketed since the beginning of 2012.


<img src="/media/images/user_14219/screen-shot-2012-12-04-at-92707-am_large.png" />

However, investors should not be misled by the recent shot up in its ROE in the beginning of 2012. If we look closer, we can see that for the rest of 2012, its return on equity turned out to be negative. It was due to the negative book value on the denominator of the ratio.

In 2007, it had more than $1.5 billion in stockholders’ equity, along with more than $1.2 billion in goodwill and intangibles, and $1.27 billion in long-term debt. However, as of September, the goodwill and intangible assets have been wiped out, only totaling $53 million. Its long-term debt also significantly decreased to only $100 million. The cash position has improved a little from $1.38 billion in 2007 to nearly $1.5 billion now. With the goodwill and intangibles wiped out, it dragged its equity into a negative number, -$27 million.

Currently, VeriSign is trading at $35.88 per share, with the total market capitalization of $5.57 billion. It is currently valued at 15.9x forward earnings and 1x PEG. It was much more expensive than Tucows 5.2x forward P/E. Symantec and Innodata are also valued much cheaper, at only 10.9x and 8.1x forward earnings respectively. 

Foolish Bottom Line

I would not worry so much about the negative book value, as the goodwill and intangible items have been wiped out. The regulation has given VeriSign its economic moat for its authoritative registry operation and .net domain names. However, nobody knows the customer concentration and the regulatory framework change could affect the company within the 6-year contract term. I personally would demand a cheaper price in order to establish the position in the company. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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