Daily Double
Ticker: (Nasdaq: VRSN)
Phone: 650-961-7500
Website: www.verisign.com
Price (9/24/99): $102 1/8
By
Monday, September 27, 1999
How Did it Double?
The story of why VeriSign has been one of the hottest stocks over the past year can be summed up in two phrases. The Internet is growing like kudzu, and VeriSign simply dominates its niche in the market. In other words, investors have realized that VeriSign's "trust services" have nearly become the de facto standard on the Internet, and the price of the shares has responded to the company's success in securing a controlling portion of its market.
It was almost exactly a year ago that VeriSign was setting a new annual low. By the middle of October VeriSign shares were trading under $10 a share, adjusted for splits, with trading volume and investor interest anemic. But by the beginning of 1999, the stock had already tripled from its low to near $30 a share. That was just the beginning of what was to come for VeriSign investors as the stock has increased in value to more than 10 times the level it was a year ago.
Like most other Internet-related issues, the stock has been incredibly volatile. In fact, the company could have been highlighted in a Daily Trouble in May since the stock fell from a high of over $94 in April to below $46 less than a month later. Nevertheless, even those who bought at the peak of the April Internet mania are showing positive returns today. One might say that long-term investors who read the sign have a verified Double.
Business Description
Based in Mountain View, California, VeriSign calls itself a "trust services" company. The firm is the largest distributor of digital certificates used for identification purposes on networks. The company's digital IDs protect access to information over intranets, extranets, and the Internet. This allows for safer communication and e-commerce activities where security and access control is needed.
Over 150,000 websites have purchased the company's digital certificates and nearly 4 million individuals have been issued certificates for use in online surfing and buying. VeriSign claims that all Fortune 500 companies with a Web presence and all of the top 40 electronic commerce websites listed by Media Metrix use its digital certificate services.
Microsoft (Nasdaq: MSFT) has anointed VeriSign's system its "preferred provider" of digital IDs for use in the company's Web browser, Internet Explorer. Netscape's Navigator browser also supports the use of VeriSign's digital certificates.
VeriSign has numerous heavy hitters backing the company. Visa, Intel (Nasdaq: INTC), and Microsoft all own sizable chunks of VeriSign's stock. VeriSign was spun off from RSA Data Security (Nasdaq: RSAS) in 1995 and came public in early 1998.
Financial Facts
Income Statement
12-month sales: $58.0 million
12-month income: ($12.4 million)
12-month EPS: ($0.75)
Profit Margin: N/A
Market Cap: $5,061.2 million
Balance Sheet
Cash and Equivalents: $154.7 million
Current Assets: $175.9 million
Total Assets: $196.8 million
Current Liabilities: $32.1 million
Long-term Debt: None
Total Liabilities: $32.6 million
Shareholders' Equity: $164.2 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 87.3
How Could You Have Found This Double?
One way to have found VeriSign was to look for companies with increasing revenues. The company has more than doubled its sales year-over-year going all the way back to 1997. Plus, the company has shown greatly improving margins over time, and, barring total disaster, profitability is expected by the end of the year.
Even if VeriSign hasn't been profitable to-date, the company, more importantly, has been cash flow positive. There's a saying in business that profits are fiction, cash flow is reality. The reality with VeriSign is that its operations are taking in more cash than they are consuming. Either way, it is certainly worthwhile to keep track of any company's Statement of Cash Flows.
Finally, one may have spotted VeriSign's success by just looking at the market the company serves. It only makes sense that the e-commerce security market would rally behind one technology and make that the "standard" security system. It's almost a winner-take-all situation, and VeriSign has had the lead for some time now.
Where to From Here?
It's an extremely safe assumption that VeriSign will show profits in the near future. The company's sales are expanding much more rapidly than its costs, and the trend is certainly towards even higher margins and gross cash flow. Plus, the company has significant amounts of "unearned revenue" on its books thanks to the fact that many of its services are done on a subscription basis. There is nearly a guarantee of sales growth and visibility for at least the next few quarters.
From a strategic positioning standpoint, VeriSign looks like it has almost wrapped up a pseudo-monopoly in the Internet trust services market. Its digital IDs are nearly a standard in the market, and it will be extremely difficult for upstart competitors, such as Custom Tracks (Nasdaq: CUST), to crack VeriSign's stranglehold. This is a case where the strong will get stronger and winners should take all.
Looking at the valuation, it's fairly obvious that the company's stock price is extremely lofty. Trading at almost 100 times trailing sales and at roughly 300 times forward profit estimates, much of the optimism concerning the company has already been priced into the stock. Nevertheless, VeriSign is far ahead in the race for a ubiquitous and secure online payment and information exchange system. At today's price it's not exactly a stock for those not comfortable in purchasing richly valued stocks, but it's definitely one to keep on the radar should the market discount the shares in the near future.
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