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Buffett's VeriSign Stake Is Overvalued

- By Jonathan Poland

We may be in a dot-com world with VeriSign (VRSN) at the center of it, but that doesn't mean investors should pay too much for the company's stock, even if it is one of Warren Buffett (Trades, Portfolio)'s top holdings.


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While the stock currently trades just shy of $150 a share, Berkshire Hathaway (BRK-A)(BRK-B) built the majority of its stake in 2013 and 2014 at prices between $45 and $50 per share. Back then, the market cap hovered between $7 billion and $8 billion. Today, thanks to aggressive buybacks, the stock is three times more expensive, but the underlying fundamentals are not three times more valuable.

Over the last five years, VeriSign's revenue has only seen modest growth, going from $965 million to $1.2 billion, booking total revenue of $2.68 billion. In that time, earnings per share and cash flow are essentially flat.

Dominant business, poor price point

VeriSign almost exclusively relies on its domain registry business for revenue, and with the sheer amount of Internet-based assets on the market that stream will last a while. In fact, if you have a .com or .net, VeriSign gets paid.

The company also operates two of the world's 13 internet root servers, making the company a vital component of internet infrastructure and user experience, and ensuring its ICANN contract will renew as long as the company is financially fit. More importantly, domain prices are set to rise as much as 10% a year starting in 2020. That will help strengthen the company's fundamentals, but even if VeriSign doubles revenue and profit in the next decade, that still might not be enough to justify the price investors are currently paying for the stock.

Verisign is expected to earn over $5 a share in 2019, putting the forward earnings multiple at 30x, which is six points higher than its five-year average multiple. These shares should not be priced at such a premium. Google's forward P/E is 22x. Facebook's forward P/E is 18x. VeriSign is more of utility at this point, and should be valued like one, which means at best 15x earnings -- pricing the stock in the $75 range.

Disclosure: I am not long or short any stock mentioned.

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This article first appeared on GuruFocus.