VeriSign Stock Appears To Be Fairly Valued
- By GF Value
The stock of VeriSign (NAS:VRSN, 30-year Financials) shows every sign of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $219.845 per share and the market cap of $24.8 billion, VeriSign stock is believed to be fairly valued. GF Value for VeriSign is shown in the chart below.
Because VeriSign is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 5.4% over the past three years and is estimated to grow 3.91% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. VeriSign has a cash-to-debt ratio of 0.66, which which ranks worse than 76% of the companies in Software industry. The overall financial strength of VeriSign is 2 out of 10, which indicates that the financial strength of VeriSign is poor. This is the debt and cash of VeriSign over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. VeriSign has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.3 billion and earnings of $5.52 a share. Its operating margin is 64.91%, which ranks better than 99% of the companies in Software industry. Overall, GuruFocus ranks the profitability of VeriSign at 9 out of 10, which indicates strong profitability. This is the revenue and net income of VeriSign over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of VeriSign is 5.4%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth rate is 6.6%, which ranks in the middle range of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, VeriSign's return on invested capital is 48.82, and its cost of capital is 6.86. The historical ROIC vs WACC comparison of VeriSign is shown below:
To conclude, the stock of VeriSign (NAS:VRSN, 30-year Financials) gives every indication of being fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about VeriSign stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
