Marketing Initiatives Will Improve Domain Registration Stability

Key Takeaways

• Increased marketing efforts and strategic programs targeting .com and .net registrars are likely to drive revenue growth and expand the domain name base.
  
• Share repurchase programs and reduced share count are expected to enhance earnings per share and contribute to long-term financial stability.
  
• Declining domain name base and increased operating expenses threaten VeriSign's revenue growth and net margins amidst decreasing new registrations and China market challenges.

Catalysts

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

• VeriSign expects the decline in the domain name base from China registrars to be more muted as it now represents only 5% of their business, which is likely to positively impact revenue stability.
  
• The company has initiated new marketing programs targeting .com and .net registrars to increase customer acquisition, which could drive revenue growth through an expanding domain name base.
  
• The expected increase in marketing efforts by registrars, including high-visibility initiatives such as Super Bowl ads, is anticipated to stimulate domain registrations, which may improve revenue and domain transaction volumes.
  
• VeriSign's continued reduction in shares outstanding through share repurchase programs, with $1 billion remaining authorized, is likely to enhance earnings per share by effectively reducing share count over time.
  
• Positive feedback and adoption of the company's more flexible, registrar-tailored marketing programs could enhance renewal rates and mitigate churn, contributing to long-term revenue growth and potentially improved net income margins.

VeriSign Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on VeriSign compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming VeriSign's revenue will grow by 4.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 50.4% today to 50.3% in 3 years time.
• The bullish analysts expect earnings to reach $899.0 million (and earnings per share of $10.42) by about April 2028, up from $785.7 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 bullish analyst cohort, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, up from 30.1x today. This future PE is lower than the current PE for the US IT industry at 33.9x.
• Analysts expect the number of shares outstanding to decline by 5.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

VeriSign Future Earnings Per Share Growth

Risks

• The decline in the domain name base, with a year-over-year decrease of 2.1% in .com and .net domains, poses a risk to revenue growth as the company's primary business is domain registration.
  
• The anticipated continued decline of the domain name base in 2025, projected at negative 2.3% to negative 0.3%, could further affect revenue by reducing the number of recurring fees from domain renewals.
  
• The decrease in domain volumes from China-based registrars, even if expected to lessen, can adversely impact revenues given the significant role China plays in the global domain market.
  
• The focus of U.S. registrars on average revenue per user at the expense of acquiring new customers has affected new registrations, potentially leading to slower growth in operating income.
  
• Operating expenses increased significantly in the fourth quarter due to prior expenditure delays, which could pressure net margins if such spending patterns continue.

Valuation

• The assumed bullish price target for VeriSign is $268.3, which represents one standard deviation above the consensus price target of $235.28. 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $275.0, and the most bearish reporting a price target of just $196.11.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $899.0 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 8.0%.
• Given the current share price of $250.23, the bullish analyst price target of $268.3 is 6.7% 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.