Steady Revenue Growth To Drive Verisign Stock To Fresh Highs

Despite already rising more than 35% from its low in March 2020, at the current price of $208 per share, we believe Verisign stock (NASDAQ: VRSN) has further upside potential. Verisign stock has increased from $151 to $208 off the 2020 bottom, much less than the S&P which increased by around 80% from its lows. Further, the stock is down around 2-3% from the level it was at before the pandemic. We believe that Verisign stock could rise around 10% to set fresh highs above its late-2020 levels of $220, driven by expectations of continued strong demand and strong full-year 2020 results despite the pandemic. Our dashboard What Factors Drove 82% Change In Verisign Stock Between 2017 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2017-end came due to a 9% rise in revenue from $1.17 billion in FY 2017 to $1.26 billion in FY 2020. Net margins rose from 39.2% to 64.4% over this period, and despite a 15% rise in the outstanding share count, EPS jumped 55% from $4.56 in 2017 to $7.08 in 2020.

Verisign’s P/E (price-to-earnings) multiple rose from 25x in 2017 to 31x by 2020 end, but has since dropped to 29x. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus saw a rise in online activity, driving businesses to either shift online entirely, or develop some sort of an online presence. Verisign is in the business of selling domain names on a subscription basis, and has thus benefited from the pandemic. This is evident from Verisign’s full-year 2020 results, where revenue came in at $1.26 billion, up from $1.23 billion in 2019. Further, the company managed to control expenses in line with revenue growth, and operating margins came in constant at around 65%. EPS jumped from $5.17 to $7.08, but this was largely due to a one-time tax benefit of $64 million vs a tax expense of $146 million in 2019.

Additionally, despite the lockdowns being lifted, we believe the company will continue seeing steady revenue growth in the medium term, as domain subscription growth is expected to stay strong, and if Verisign manages to continue controlling expenses, profitability could rise further in the medium term. This will additionally raise investor expectations, driving up the company’s P/E multiple. We believe that Verisign stock can rise around 10% from current levels, to set fresh highs above its 2020 high of $220.

While Verisign stock does seem attractive currently, 2020 has created many more pricing discontinuities which can offer further trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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