Is Verisign a Buying Opportunity?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Verisign (NASDAQ: VRSN)’s stock dropped about 15% on October 26 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 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.
Billionaire Stephen Mandel’s Lone Pine Capital had reported a position of 8.6 million shares in Verisign - 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 (NASDAQ: ORCL), whose Java software is used on many Internet platforms, networking technology company F5 Networks (NASDAQ: FFIV), and infrastructure software companies Red Hat (NYSE: RHT) and SolarWinds (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.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of F5 Networks and Oracle. Motley Fool newsletter services recommend F5 Networks. 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.If you have questions about this post or the Fool’s blog network, click here for information.