Verisign: A Long Term Stock Idea with Resistance at $40
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Internet services company Verisign (NASDAQ: VRSN) has completed a multi-year downsizing program, leaving the company with its very profitable core business. Currently that core business is growing at stable rates with no slowing expected at least in the near future. The company has additional opportunities for expansion into new Internet focused services.
Verisign works in the basic structure of the Internet, providing domain registration services for all dot-com, dot-net and dot-gov domains plus a few lesser know domain suffixes. The company provides a server network which ensures the owners of the various dot-something domain names are always connected when someone goes to a specific domain on the Internet. The company is given authorization to maintain the Internet infrastructure for the domain suffixes and registered domain names by the Internet Corporation for Assigned Names and Numbers – ICANN – on six year contracts with not quite automatic renewals. If the company has managed the top level domains without incident, the contracts should be renewed by ICANN.
By mid-2011 Verisign had completed the divesture of 13 bundles of business units over a 4-year period. In that time, the company went from 5,000 employees to around 1,000 and almost 90 global locations to 10. The restructuring resulted in a company focused on its core top level domain name business and $1.2 billion in cash on the books.
At this point the Verisign business growth is determined by the number of new domain names bought under the top line domains it manages and the renewal rates for existing domain names. The math is pretty simple: As long as the number of website domain names keeps growing, Verisign will grow its revenue and profits. For the third quarter of 2011, the company reported 7.9 million new domain name registration for the quarter bringing the company total to 112 million, a gain of 8 percent year-over near. Renewal rates for the quarter was forecast to be 73.4 percent, up from 73.1 percent in the second quarter. It is important to note the 112 million domains are for dot-com and dot-net. The company became the manager of dot-gov in 2011 providing another source of revenue. The result of the domain name growth was a year-over-year revenue increase of 14 percent for the third quarter. With the divestitures, the Verisign non-GAAP operating margin has increased from 30 percent to 50 percent since early 2009.
Verisign reports its 2011 fourth quarter results on February 26 after the market closes. The consensus earnings estimate for the quarter is 41 cents per share, about 33 percent higher than the 31 cents earned in Q4 of 2010. If Verisign hits the quarterly number, the full year results will be earnings of $1.50 per share, up 45 percent from the $1.03 earned in 2010. Each of the last two quarters, the company has beat the consensus estimate by a couple of cents. The Wall Street average has moved up by those 2 cents over the last 90 days, so it will be interesting to see how the numbers come out later this week.
The longer term prospect for Verisign look bright. There seems to be no let up in the growth of new domain names and every new .com and .net is money in the bank. At a recent technology conference put on by Credit Suisse, CEO and Chairman Jim Bidzos discussed growth opportunities using the Verisign Internet infrastructure network to provide valued added services in the areas of network security and network reliability. The new, slimmer company is looking for ways to boost revenues and profits without adding a lot of new overhead.
The Verisign share price hit a recent peak of over $37 back in May 2011. The share value fell to around $27 in the fall, in spite of in line and growing earnings results. The recent recovery in the value of VRSN puts it again back at $36. There seems to be resistance as the share price moves up towards $40 and the stock price has not been able to make a sustainable move above that level in the last five years, even though it approached the level several times over those years. Investors looking for a long term hold should be aware of the resistance at $40. A move above that price should allow further price gains and the technical type traders would then view the $40 as a price floor.
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