Is This Company ‘Disruptive’ Enough to Make You Money?
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At the 2012 Invest for Kids conference, Lone Pine Capital's Steven Mandel gave an investment pitch on one of his new favorite stocks, Verisign (NASDAQ: VRSN). Mandel's Verisign pitch is centered around his investing outlook: "technological change makes winners and losers, and the Internet is the most disruptive force in the space."
This thesis is exhibited by Lone Pine's three largest 2Q 13F holdings - Apple, Google and Priceline - all very disruptive companies. Mandel first bought shares of Verisign back in late August, revealing a 5.5% ownership in the Internet company. At the conference, Mandel made note that Lone Pine now owns around 9% of the company. Mandel has around $17 billion of assets under management and is a Tiger cub, having left Robertson in 1997 to start Lone Pine Capital.
Verisign is the leading provider of Internet domain name registry services for .com and .net domains, with over 105 million .com domains and 5 million .net domains. The registry operator is currently able to bring in $7.95 per year per domain name, allowing for solid reoccurring cash generation.
The stock got crushed in late October after its 3Q earnings announcement. Third quarter results saw EPS of $0.50, compared to $0.39 for the same quarter last year and beating consensus of $0.49. What really weighed on the company were possible delays in the renewal of its contract with ICANN, which determines the prices that Verisign can charge. The Department of Commerce is now seeking input from the Department of Justice on the contract. Mandel rebukes the stock's fall by noting that the last time the contract was up for renewal in 2006, the DOC also sought input from the DOJ and ultimately approved the contract.
Worth noting is that there are currently no other bidders for the ICANN contract. Mandel notes that Verisign is the only company feasibly capable of performing the registry operations and has been operating for fifteen years. Since the large fall, the Internet company has only rebounded 5%, trading just over $40 per share, where it previously traded over $45. Following Mandel's pitch, Verisign announced that the DOJ had all but concluded its review and that the company expects to be operating .com registries following the contract renewal date of November 30th.
Mandel's investment thesis is that Verisign will be able to see 5-7% growth in .com and .net registrations, as well as 7% price appreciation over the next four years. These together should drive four-year EPS up 25% annually, putting 2014 EPS at $3 even. The Internet company currently yields 5% on free cash flow, and Mandel expects that it has room to appreciate 50% over the next couple years.
In the downside scenario, where Mandel sees the off chance that the DOC does not allow for any price increases going forward, he still sees 2013 EPS at $2.50 - 15% above current analysts' estimates. As a result, Mandel sees little reason to be bearish on this investment.
The Russian Internet company, Yandex, plans to lower CapEx in order to further focus on core operations. Yandex managed to post revenue growth of 50% for the first half of 2012, compared to the same period in 2011. Management also offered full year revenue growth guidance of 40-45% for 2012 compared to last year. Yandex has some of the best growth prospects of the five Internet companies we have listed and is expected to grow five-year EPS at a 35% CAGR.
Red Hat is expected to see fiscal year 2013 revenues up 17%, following the 25% 2012 increase. Driving this growth should be increasing server sales, despite a slowly growing economy. The tech spending pullback experienced by these companies has left for some pent up demand that Red Hat should be able to capitalize on. Red Hat also has virtualization products that should perform well as companies transition into cloud computing more heavily.
Akamai recently reported 3Q EPS of $0.27, versus $0.23 for the same quarter last year. Revenue was up 23% from the same quarter last year on strength across all products and geographies. On the back of the beat, Canaccord upgraded the company to a buy.
Equinix is a data center operator up over 70% year to date after having beat EPS estimates by at least 20% in the first two quarters of 2012. 3Q results came in as expected, but the company kept full year guidance the same, in a time when many companies have revised estimates downward. The one downside for this data center company is that it is the only one of the five that carries debt, with a debt to equity ratio of 1.3.
Based on valuation, we are a fan of Verisign above any of the other four tech and Internet companies listed. John Griffin is also a fan of Verisign. At the end of 2Q Griffin owned 6.2 million shares, making up over 4% of his firm's 2Q 13F - check out all of the other funds loving Verisign. Verisign is currently trading at a trailing P/E of 26x and forward P/E of 19x, while the average of the other four tech companies is at 50x trailing earnings.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Akamai Technologies and Yandex. 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.