Summary
VeriSign has multi-year contracts to operate the .com and .net internet registries, helping the company maintain a stable financial profile.
The company has invested most of its FCF in buying back shares, driving up valuations to P/S of 16-17x.
However, muted revenue growth has been reducing the returns to shareholders.
Further, the interest rates are likely to continue rising.
Unless the management plans to continue arbitraging debt to buy back equity, it should become difficult for the VeriSign stock to trade at such elevated levels.
VeriSign (VRSN) had been investing the gains from a stable business in share repurchases, leading to strong stock price appreciation. The hardening of interest rates, coupled with the declining TSR of the company’s buyback program, is likely to weigh in on valuations, which can lead to a significant decline in stock price.
The story
VRSN’s claim to fame is the company’s ownership rights to operate .com and .net internet registries. Furthermore, VRSN has been granted an exclusive operator status to manage .com and .net by way of the company’s contract with Internet Corporation for Assigned Names and Numbers (ICANN). The exclusivity extends up to 2023 and 2024 for .net and .com, respectively.
VRSN's history of operation of .net and .com, rumors of a nexus with ICANN and expectation of a contract renewal in 2016 led to cloak and dagger stories. The company was able to renew its contract with ICANN in October 2016. VRSN continues to be the exclusive operator of .com and .net registries, driving volumes for the company.
