Chart of the Day – $VRSN: King of Their Domain

by Enis August 26, 2014 2:39 pm • Commentary

Verisign is one of the stalwarts in the internet’s infrastructure, and remains a key cog in network security and internet operations.  The stock has struggled so far in 2014, down 4.5%, even as the technology sector has been strong.  However, VRSN has perked up ever since a well-received earnings report in late July, after which the stock gapped higher and closed up 11.5%.

One rare characteristic of VRSN is that the top 3 holders own more than 46% of the company.  Those three holders are Capital Group (26%), Berkshire Hathaway (10%), and T Rowe Price (10%).  Two mutual fund behemoths and Berkshire.

Warren Buffett initially bought VRSN in the fourth quarter of 2012, and recently added to the position (going from about 9% to about 10% of the total company’s shares).  This is a rare technology holding for Berkshire, though it’s a reasonable selection given Verisign’s position as one of the few private stewards of the Internet’s root nameservers and the authoritative registry for the .com and .net registries.  In other words, VRSN has little competition, and is essentially an internet utility company, collecting regulated fees for maintaining crucial internet infrastructure.

In that vein, the company has steadily grown sales at an annual rate of 10-15% over the  past 3 years, and is expected to grow sales at a rate of 5-10% going forward.  EPS growth is expected at 10-15%, which is reasonable for a 24 P/E stock.  While VRSN is no bargain, the consistency of its business model, with no major competitive threats, means that a valuation that is in line with companies of similar earnings growth could be considered quite cheap.  At least, that’s what I think the investors at Berkshire are thinking.

VRSN has been relatively stagnant since the fall of 2012, when the company first acknowledged that its pricing arrangements with the U.S. government might lead to lower fees than before:

VRSN weekly chart, Courtesy of Bloomberg
VRSN weekly chart, Courtesy of Bloomberg

Berkshire is one of the investors who is content to own the shares even though future sales and EPS growth is going to be lower as a result of the pricing contracts, which extend until 2017-2018.  The stock is comfortably back above the $50 inflection point after the late July earnings report.

Given Berkshire’s obvious interest in the shares below $50, and the concentrated investor base to start, VRSN is likely a good stock to keep an eye on to buy if it declines to near that level in the coming months.