Buy Verisign Stock For Further Gains
Up more than 30% since March, we believe Verisign stock (NASDAQ: VRSN) has further room for more than 10% upside to levels around its mid-2020 high. The company sells web domains on a subscription basis and its stock trades at $200 currently, the same level it was at, in the start of 2020. It traded at $211 in February 2020 – just before the outbreak of coronavirus – and is currently 5% below that level. With the surge in online activity since the pandemic, demand for the company’s service will only rise further in the near to medium term, and the stock has the potential to gain around 10% to its 2020-high. Our conclusion is based on our comparative analysis of Verisign stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 69% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here is how VRSN stock and the broader market fared during the 2007-08 crisis.
Timeline of 2007-08 Crisis
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- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
VRSN and S&P 500 Performance Over 2007-08 Financial Crisis
We see VRSN stock declined from levels of around $31 in September 2008 (pre-crisis peak) to levels of around $19 in March 2009 (as the markets bottomed out), implying VRSN stock lost almost 40% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to $24 in early 2010, rising more than 20% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.
VRSN Fundamentals Over Recent Years
VRSN revenues increased from $1.1 billion in 2016 to $1.2 billion in 2019, a steady rise in line with the increase in domains sold. Along with higher revenue, earnings also increased from $4.12 to $5.17 during this period.
Does VRSN Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Verisign’s VRSN debt comes in the form of senior notes, with an outstanding liability of $1.79 billion. Verisign’s total cash stands at $1.2 billion and the company generated around $750 million cash from operations in fiscal 2019. This strong cash position combined with steady cash from operations provides the company a reasonable cushion to deal with the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
With the recent surge in the number of new Covid-19 cases in the U.S., we see the work from home trend continuing in the near term, causing a rise in online blogs and businesses, driving up demand for web domains. We believe that Verisign stock has further upside potential in the near term, and even as the lockdowns are gradually lifted, a drop in domain demand does not seem very likely. This could see VRSN stock potentially rise around 10% from its current level
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