Is VeriSign Still a Bargain With Its Recent Success?

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Internet registry and infrastructure company VeriSign (NASDAQ: VRSN  ) received big boosts with the announcement that Warren Buffett's Berkshire Hathaway had added to its position, while Stephen Mandel's Lone Pine Capital had held nearly 12 million shares as of March.. The company had been suffering from pricing issues (regulators blocked a price hike late last year), but has since gone on to rally near its 52-week high. Back in July, it posted a positive earnings report and beat analyst estimates. There's little question that VeriSign is doing (and is set to continue doing) well, but has the value been snatched up? Let's take a closer look to find out.

Encouraging numbers
If VeriSign's recent earnings report is indicative of what is to come, there's little for investors to worry about. The company posted 12% revenue growth to $239 million, with the adjusted bottom line coming in at $0.58 per share, compared to $0.45 per share in the same quarter of 2012.

Operating margin jumped substantially, from 54% in the year-ago quarter to 58.9% for 2013. Cash flow from operations came in at $147 million, up from $135 million a year ago.

During the quarter, the company added more than 1 million new registry names, processed nearly 9 million domain name registrations, and held a roughly 73% renewal rate.

Being a giant in the space with major brand power, minting cash with substantial recurring revenues, and a solid management team, it's not hard to understand why the tech-averse Berkshire saw opportunity in the company. The conglomerate owns approximately 11 million shares of VeriSign, increasing its holdings over the summer months.

The question, again, is a matter of upside potential. VeriSign trades at just under 20 times its 2014 earnings estimate of $2.55 per share. For a tech company, this is by no means a rich valuation. But VeriSign isn't a typical tech company, and the price assumes much of the expected growth.

Limited upside
It should be noted that VeriSign, while in the Internet space and certainly holding a technology component, is not a tech-heavy company, and does not hold the "tech risk" that many software and hardware developers face. VeriSign's business is very much a service-oriented one, and will not be squeezed out unexpectedly by a product that rewrites the rules of the game.

Still, the company holds favorable growth prospects and just posted double-digit increases across the board.

VeriSign has a comfortable balance sheet, with a recent influx of cash ($2 billion in the coffers) from a senior notes offering. Its market position is very strong and the company's growth should continue at a relatively quick rate. One great thing about low-risk tech plays is that they are typically low capital expenditure businesses with a high ROIC. VeriSign is no exception to this.

At its current price, the company is reasonably valued -- neither cheap nor pricey. The market has been looking closely at the stock since Buffett's purchase, and leaves little room for bargains since the dip last year. But it does not have a too-hot-to-touch price that many tech companies hold. For an investor interested in high growth at a fair price (likely upside but not a home run), with the safety net of the "Buffett factor," VeriSign remains an attractive play.

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9/29/2016 2:39 PM
VRSN $78.78 Down -0.64 -0.81%
VeriSign CAPS Rating: ****