VeriSign (NASDAQ: VRSN) had excellent performance in 2007. The stock ran from the low $20s to the low $40s, and now has settled in at $37.54. My 2008 price target for VeriSign is $55. It will be an interesting year for this company -- the toll booth of the internet.
I wrote about VeriSign back in late May 2007 when the tenured CEO, Stratton Sclavos, abruptly left the company. Sclavos was CEO for 11 years, having taken the company through its 1998 IPO and many, many acquisitions. Since his quick departure last May, the stock has gone up from $25 to its current price. The market has voted favorably on this CEO's departure. So what makes VeriSign a great buy for 2008?
VeriSign is the internet's gatekeeper. All addresses ending in .com and .net are housed with VeriSign, as it serves as the master registry. All communications from email to web searches must go through the VeriSign data center. As of last quarter there are 75 million domain names ending in .com and .net, and they're growing by 25% year over year. Regardless of where the .com or .net address was purchased, VeriSign earns $6 per name per year. VeriSign has the authority to act as the master registry from the U.S. Department of Commerce, which recently allowed for a price increase of 7%, allowing VeriSign to earn $6.42 per .com address. VeriSign can further raise the price 7% per year in three of the next five years.
The VeriSign data center handles 20 billion look-ups per day. VeriSign is also the largest issuer of web site digital certificates. The certificates secure the sensitive e-commerce connections. Certainly you have seen the term "VeriSign Inside" when you've bought something through Amazon or other secure e-commerce web sites. VeriSign encrypts the transaction and has never been hacked. The beauty of the sales model is that the certificates are sold on a per-server per-year basis, and pricing averages about $240 per server.
The registry for .com and .net, and the web site digital certificates business yield extremely high gross and operating margins. VeriSign's stock has lifted these past few months because new senior management has indicated they will sell off several non-core business lines and sharpen VeriSign's focus. This is why the stock will continue to run in 2008.
VeriSign is involved in the telecommunications sector and the ecommerce bill-paying and -settling space. Basically, these are non-core, and will more than likely be sold off in 2008. These other business lines have been a drag on growth and margins. The operating margins have actually risen to 23%, but if VeriSign sheds the non-core businesses and focuses on the registry and web site digital certificates, the operating margins could climb up to 38%-40%. The revenue and earnings growth should also post up 25% -30% growth and be sustainable for the next several years.
VeriSign will be in the news a lot this coming year as it sells off its peripheral assets and unleashes the underlying growth of its core business.
Georges Yared is the CIO of Yared Investment Research the author of Stop Losing Money Today.
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