Why Is VeriSign So Veri Expensive?
By Jay Somaney
1/11/01 12:04 PM ET
The markets continue in their churning mode, with investors seemingly stymied which direction to take. The market loves tech one day and then absolutely hates it another. Given the current environment, it is completely baffling to me that we have companies still valued at absurd multiples, a la VeriSign (VRSN:Nasdaq) .
So what does VeriSign do? It's the largest provider of Internet trust management services, providing a complete array of products that allows any company to establish an Internet presence -- including domain registration through its acquisition last year of Network Solutions.
In addition, through its payment and trust infrastructure platform, VeriSign allows companies to e-commerce-enable their Web sites, allowing users to buy goods and services there. The fact that VeriSign has a dominant position and killer brand name cannot be disputed. VeriSign is also the best of breed in its category, and the proverbial 800-pound gorilla of its group. However, my contention is not with the dominance of the company, but with how expensive it is relative to potential competitors.
At approximately $75 per share, the company's current market capitalization is at just a shade under $16 billion, down almost 72% from its high last spring of $56 billion. That fact alone might make some people think the stock is now finally cheap. However, before running out and loading up on it, take a look at the following numbers. VeriSign is still valued at almost 35 times expected 2000 sales of $490 million and 17 times expected sales of $965 million for 2001.
I Saw the Sign
There is no question that its revenue growth is very impressive, albeit a little skewed for year-over-year comparisons due to the acquisition of Network Solutions in the middle of the second quarter of 2000. On an earnings basis, the company is still valued at a shocking 227 times expected calendar 2000 earnings of 33 cents per share and at 137 times expected earnings of 55 cents per share.
There is also no doubt that the market for VeriSign's services and that of its competitors is expected to continue to grow at a rapid pace. Analysts expect the market for domain registration, trust and verification services to grow from approximately $5.66 billion in 2000 to almost $16 billion in 2004.
However, to VeriSign's dismay, it is exactly this heady growth forecast that is drawing competition like a swarm of bees over Winnie the Pooh. VeriSign faces competition in one form or another from Check Point Software Technologies (CHKP:Nasdaq) , Symantec (SYMC:Nasdaq) , CheckFree (CKFR:Nasdaq) , Register.com (RCOM:Nasdaq) and a host of others.
Even Cisco (CSCO:Nasdaq) has decided to get in on the act with its VPN/firewall security range of products (although I will be the first to admit that in all likelihood VeriSign should prove more than adequate to fight off its competitors and continue to grow at a rapid clip).
Before the email barrage begins, readers need to keep that last fact in mind: I love the company and absolutely think that it is one of the key Internet infrastructure plays with a dominant market share. My concern is purely with valuation, given the current investment climate, and the valuation of one of its chief competitors, Entrust Technologies (ENTU:Nasdaq) , a company that trades at a fraction of VeriSign's multiples.
Trust Entrust?
Entrust is currently valued at a relatively beggarly six times expected year 2000 revenues of approximately $135 million. Despite the bizarre episode of its CFO resigning in November and then withdrawing his resignation a few weeks later, Entrust presents a compelling valuation at these levels vis-a-vis VeriSign. |
