Not the most positive news to come out, but Individual Investor Online magazine had the following thoughts on VRSN:
Feb 18, 1999
Internet: SELL SIGNALS: Verisign Valued Very Richly
Adam Lowensteiner
Every so often we check traffic statistics on our website to monitor what stories are popular. In addition, we also look at which stocks have been getting hit a lot by visitors to our site. One of those stocks that has been getting tons of hits is Verisign (NASDAQ:VRSN - news) , a company involved in Internet security.
As we all know that the Internet has become the hot item of the 90s, as was radio in the 30s and TV in the 50s. But behind all the glitz and glamour it brings, the Internet has also fallen prey to hackers and the like as a number of high-profile websites have been defaced. Not too long ago, the New York Times (NYSE:NYT - news) website was hacked into, and obscene pictures were posted.
Hacking into Internet sites, as well as on-line commerce has caused damage to many companies. And with Internet commerce expected to grow to a $223 billion industry by 2001 according to IDC, companies are now looking to companies like Verisign for protection from hackers.
Too Expensive
Verisign is what we at Individual Investor would classify as a hot stock, a stock continually making new highs on momentum. Obviously throw in the word Internet in your company's description page, and poof, you have an expensive stock. Verisign has lots of business, more than it can handle in fact. Just look at the recent financial results. Revenue was up 164%. Not shabby at all. But looking beneath the surface, it's clear to me that I would not touch Verisign at these levels.
The company sports a market cap of $2 billion. Its sales were $38 million in 1998, meaning the stock trades for more than 50 times revenue. The company also recently completed a public offering of 3.2 million shares, half of which were sold by shareholders, the other half were sold by the company. Meanwhile, adding another 1.6 million shares did not mean much to an unprofitable company.
Verisign is financially set, with a decent amount of cash on hand. The thing that worries me is the valuation. The company is estimated to hit breakeven this year, and mount $0.65 a share next year. Even using a p/e of 100, double the earnings per share growth rate, Verisign is worth $65 a share, much lower than a present $88 a share. Plus, with the secondary, it is never a good sign seeing large shareholders bail on the stock.
We Like Secure Computing and Axent Technologies
Two other players in the Internet security business are Secure Computing (NASDAQ:SCUR - news) and Axent Technologies (NASDAQ:AXNT - news) , which may be better plays. Both companies were involved in supplying security software to networks so people could not hack into other people's files. It happens to be that with the growth of the Internet, these companies made moves to enter the Internet markets. With the Internet essentially being one big network, the technology is not too different from the existing products these companies made.
Secure trades for 6.8 times sales, a bit more respectable that Verisign, and should earn $0.75 a share this year, trading for about 30 times that estimate. Secure's earnings should grow at least 40% to $1.05 a share in 2000. Assuming 40 times the 1999 estimate, Secure could reach $30 a share.
Axent recently added to its Internet operations by utilizing its war chest of $4 a share. Axent acquired Internet Tools earlier this year, which deals solely with intrusion software for the Internet. Axent trades at 9 times sales, and trades for 30 times this year's estimate of $1.05 a share. It too should grow earnings per share around 40%, and earn $1.40 a share next year. Assuming also a multiple of 40, Axent could climb back toward its high of $40 a share, and that is without the Internet hype pushing it higher.
Bottom Line:
It pays to shop around for a lower p/e stock, as these companies typically have decent margins, which translate into good cash flow at the end of the day.
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