Will VeriSign Stock Recover To Its 2021 Highs of Around $250?

VeriSign stock (NASDAQ: VRSN), a domain name provider, currently trades at $175 per share, around 30% below its peak level of $255 seen in December 2021. In comparison, its industry peer – F5 Networks stock (NASDAQ: FFIV), an application security and cloud networking company, also saw its stock decline by around 30% over the same period. VeriSign saw its stock trading at around $167 in late June 2022, just before the Fed started increasing rates, and is now 5% above that level, compared to 45% gains for the S&P 500 during this period. This underperformance of VRSN can be attributed to a slight fall in its domain names base lately. Returning to the pre-inflation shock level of $255 means that VRSN stock will have to gain 45% from here, and we don’t think this will materialize anytime soon. Our detailed analysis of VeriSign’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

The decrease in VRSN stock has been far from consistent. Returns for the stock were 17% in 2021, -19% in 2022, and 0% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that VRSN underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could VRSN face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think VRSN stock is appropriately priced, with little room for growth.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how VRSN stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

VRSN and S&P 500 Performance During 2007-08 Crisis

VRSN stock declined from $34 in September 2007 (pre-crisis peak) to around $19 in March 2009 (as the markets bottomed out), implying it lost nearly 43% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $24 in early 2010, rising 25% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

VeriSign’s Fundamentals Over Recent Years

VeriSign’s revenues rose from $1.3 billion in 2020 to $1.5 billion in 2023, driven by higher demand for domain names. VeriSign benefited from an increased demand for domain names as more businesses expand their presence online. Price increases have also bolstered the company’s top-line growth, and this trend is expected to continue in the near term. VeriSign has delivered consistent revenue growth, and its operating margin has remained stable above 65% over this period. The company’s reported bottom line increased 12% to $7.90 in 2023, vs. $7.07 in 2020.

Does VeriSign Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

VeriSign’s total debt has hovered around the $1.8 billion mark in recent years, while its total cash decreased from around $1.2 billion to $0.9 billion over the same period. The company garnered $0.9 billion in cash flows from operations in 2023. Overall, given its solid cash position, VeriSign is in a very comfortable position to meet its near-term obligations.

Conclusion

While the Fed’s efforts to tame runaway inflation rates are helping market sentiment, we believe VeriSign (VRSN) stock is now fully valued with limited upside. For 2024, VeriSign expects its domain name base to fall between 0.25% and 1.75%. Any further slowdown in domain names growth rate remains a key risk factor for VeriSign’s stock.

While VRSN stock looks like it is fully valued, it is helpful to see how VeriSign’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/2/2024
[2] Cumulative total returns since the end of 2016

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