Registrar Marketing Initiatives And Infrastructure Investments Will Improve Future Operations

Key Takeaways

• Investment in registrar marketing and .com pricing discussions could drive revenue through domain sales and market adjustments.
  
• Strong buyback programs and investment in infrastructure may boost EPS and improve margins through operational efficiencies and share reductions.
  
• Challenges in domain growth, market conditions in China, unresolved .com agreement issues, and cautious financial strategy could constrain future revenue and earnings growth.

Catalysts

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

• VeriSign is developing and piloting new registrar marketing programs aimed at boosting the domain name base, with expectations for more significant engagement in 2025. This could potentially lead to increased revenue through domain sales growth.
  
• Discussions with NTIA regarding .com pricing and the health of the .com ecosystem could result in pricing adjustments or market changes beneficial to VeriSign, which may positively impact revenue.
  
• VeriSign's consistent investment in proprietary infrastructure and cybersecurity may result in operational efficiencies and cost savings, potentially improving net margins.
  
• Robust share repurchase programs, including $1.28 billion remaining under the current program, are likely to enhance earnings per share (EPS) as fewer shares remain outstanding.
  
• VeriSign maintains significant free cash flow ($248 million in Q3 2024), which can be strategically reinvested or returned to shareholders through buybacks, potentially increasing EPS.

VeriSign Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming VeriSign's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 55.7% today to 51.0% in 3 years time.
• Analysts expect earnings to reach $857.5 million (and earnings per share of $9.6) by about December 2027, down from $858.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.5x on those 2027 earnings, up from 21.8x today. This future PE is lower than the current PE for the US IT industry at 43.8x.
• Analysts expect the number of shares outstanding to decline by 2.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

VeriSign Future Earnings Per Share Growth

Risks

• The decrease in the domain name base and lower new registrations and renewal rates, particularly due to reduced marketing spend and a focus on ARPU by registrars, could negatively impact future revenue growth.
  
• Continued weakness in the Chinese market, with macroeconomic and regulatory challenges, may continue to affect the number of registrations and renewal rates, thereby impacting revenues.
  
• Uncertainty surrounding the renewal of the .com Registry Agreement and ongoing discussions regarding .com pricing may introduce risks to future revenue and profitability if not resolved favorably.
  
• The delay in registrar engagement with new marketing programs into 2025 indicates potential challenges in achieving domain name base growth targets, which could affect future earnings projections.
  
• Despite stable cash reserves, the company’s cautious approach to leveraging and avoiding over-leverage may limit potential growth opportunities or shareholder returns through reinvestments or enhanced buyback programs, potentially impacting long-term earnings growth.

Valuation

• The analysts have a consensus price target of $212.78 for VeriSign based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $250.0, and the most bearish reporting a price target of just $195.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.7 billion, earnings will come to $857.5 million, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of $195.21, the analyst's price target of $212.78 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.