Decentralized Web Competition Will Undermine Long-Term Domain Stability

Key Takeaways

• Dependence on .com and .net domains exposes the company to risks from new technologies, competition, and changing online business habits.
  
• Regulatory changes and global internet fragmentation threaten international expansion and long-term revenue growth opportunities.
  
• Contract extensions, resilient global demand, operational reliability, and shareholder-focused capital allocation reinforce VeriSign's market dominance and bolster long-term earnings and share value.

Catalysts

Provides internet infrastructure and domain name registry services that enables internet navigation for various recognized domain names worldwide.

• The rise of decentralized web technologies, such as blockchain-based domain systems, threatens to significantly undermine reliance on centralized domain registries, risking a long-term decline in demand for .com and .net domains and reducing VeriSign's core revenue growth.
  
• Growing global government regulation and increasing adoption of data localization laws may fragment the global internet, curtailing the expansion of the international domain market and limiting future opportunities for VeriSign to grow its domain base and top-line revenue.
  
• Reliance on an undiversified business model, with the vast majority of revenue coming from .com and .net domains, leaves VeriSign vulnerable to market disruptions, regulatory changes, or contract renegotiations with ICANN or the Department of Commerce, which could severely impact revenue stability and compress operating margins.
  
• The accelerating migration of online business activity to walled-garden ecosystems, mobile applications, and social media platforms may reduce the strategic importance of standalone websites, directly impacting domain registration growth and leading to stagnating or declining earnings over time.
  
• Intensifying competition from alternative top-level domains and country code domains can take incremental market share away from .com and .net, which would put pressure on VeriSign's pricing power, stall future price increases, and negatively affect both revenue and long-term earnings potential.

VeriSign Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on VeriSign compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming VeriSign's revenue will grow by 6.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 50.0% today to 53.4% in 3 years time.
• The bearish analysts expect earnings to reach $1.0 billion (and earnings per share of $12.09) by about July 2028, up from $799.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, down from 31.2x today. This future PE is lower than the current PE for the US IT industry at 26.8x.
• Analysts expect the number of shares outstanding to decline by 4.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

VeriSign Future Earnings Per Share Growth

Risks

• The ongoing strong global growth in internet usage and increased demand for domain registrations, especially in emerging markets like Asia-Pacific, is driving both new registrations and higher renewal rates, supporting sustained revenue and earnings expansion.
  
• VeriSign's recent contract renewals with the U.S. Department of Commerce and ICANN through November 2030 lock in its .com registry monopoly for several more years, ensuring continued pricing power and consistent cash flow, which supports long-term bottom-line stability.
  
• The steadily increasing renewal rates (up from 72.7 percent to 75.5 percent year over year) and improving trends across all geographic regions reflect a broad-based resilience in demand, limiting risks to top-line growth and underpinning future revenue and margin strength.
  
• VeriSign's highly scalable cost structure and long-standing track record of uninterrupted infrastructure reliability (28 years of 100 percent availability) preserve its competitive advantages and enable high operating margins, which directly bolster net income and shareholder returns.
  
• Continued shareholder-friendly capital allocation, with large ongoing share repurchases and regular dividends, is likely to drive earnings per share growth even with modest revenue gains, offering strong support to the stock price over time.

Valuation

• The assumed bearish price target for VeriSign is $250.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of VeriSign's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $340.0, and the most bearish reporting a price target of just $250.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $266.98, the bearish analyst price target of $250.0 is 6.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.