Verisign: History Rhymes
Verisign operates the domain name registry for the .com and .net “top-level domains” (TLDs).
As the loquacious Scuttleblurb puts it:
When you type “scuttleblurb.com” into your browser, that domain name is translated into a unique series of numbers called an IP address, which corresponds to a particular computer that all other networked computers comprising the internet reference in order to find and deliver my website to you. A non-profit entity called the Internet Corporation for Assigned Names and Numbers (ICANN) was formed in 1998 to approve new generic top-level domains (gTLDs like “.com” and “.net”) and act as a central database for IP addresses…basically, an internally consistent global “phone book” that matches IP addresses to domain names.
Under 6-year agreements with ICANN, Verisign acts as the exclusive registry for the “.com”, “.net”, and “.name” gTLDs, which means Verisign is responsible for maintaining the second-level domain names – “scuttleblurb.com” or “scuttleblurb.net” – under each of these gTLDs, so that when you type “scuttleblurb.com” into your browser, one of its computers serves up the IP address so that you can read this post. Verisign provides the IP address for every dot-com and dot-net query, over 140bn of them per day. There are many other top-level domains like dot-biz, dot-name, dot-pro without nearly the gravitas of dot-com that are managed by over a thousand other registries who, in theory, compete for Verisign’s gTLDs, but in practice, don’t really stand a chance because Verisign’s agreements with ICANN are practically on auto-renew so long as it doesn’t screw up its 20 year track record of uninterrupted DNS availability for these two crucial top-level domains.
Source: [GDDY – GoDaddy; VRSN – Verisign; EIGI – Endurance International] Value Migration in Web Services (Paid service)
In 2016, Verisign’s share price took a brief but sharp -20%+ decline over fears of uncertainty that Verisign will be allowed to continue operating the .com and .net domain names.
Two things are important when it comes to understanding this issue:
Verisign has presumptive right of renewal. Verisign, not ICANN is in control of the contract renewals: The relevant language;
“This Agreement shall be renewed upon the expiration of the term set forth in Section 4.1 above and each later term, unless the following has occurred : (i) following notice of breach to Registry Operator in accordance with Section 6.1 and failure to cure such breach within the time period prescribed in Section 6.1, an arbitrator or court has determined that Registry Operator has been in fundamental and material breach of Registry Operator’s obligations set forth in Sections 3.1(a), (b), (d) or €; Section 5.2 or Section 7.3 and (ii) following the final decision of such arbitrator or court, Registry Operator has failed to comply within ten days with the decision of the arbitrator or court, or within such other time period as may be prescribed by the arbitrator or court.”
As John Huber put out in “Verisign: The Toll Road of the Internet” and well, as far as we know, there has been no major operational issue. Users who meant to go to google.com have not been unceremoniously dumped into amazon.com or wix.com.
Given the amount of money and infrastructure (government and private) that run on the web, its hard to see anyone risking a transition over to a new entity even if the preumptive right to renewal was absent. Would you risk fucking up the internet to lower domain costs by a few dollars a month? I wouldn’t. I know stakeholders wouldn’t. And there’s sure as hell little incentive to bother doing so from anyone involved. The tax Verisign levies is minute compared to the tremendous amount of value flowing through the internet tollroad and I’m not about to fix what isn’t broken.
Today, in 2024, we’re facing similar issues. Verisign share prices are down under fears that contract renewal is once again called into question.
The American Economic Liberties Project has sent letters to regulators urging them not to renew a contract with VeriSign (NASDAQ:VRSN).
The non-profit advocacy organization and a coalition of its allies sent letters to the National Telecommunications and Information Administration, or NTIA, and Department of Justice, or DOJ, asking them to "end VeriSign Inc.'s government-designated monopoly over domain registration before an August 2nd deadline to stop the automatic renewal of VeriSign's no-bid contract."
The group alleged that VeriSign's monopoly is responsible for rising costs of the most coveted website domains.
In the letter to the NTIA the group urged the agency not to renew its contract with Verisign alleging that the company has a monopoly over core internet domain names including '.com,' — which remains a popular and trusted domain name for businesses — and open up a fair bidding process, and implement a price cap.
Shares of Verisign today are down -12% YTD and -20% on a 1 year basis, and it looks like fear has reared its head once again.
For what its worth, Verisign has already put out a retort against the letters sent:
I’m not going to waste more digital ink talking about the various issues surrounding it.
I’ll simply summarise: some folks want the contract scrapped, there’s fears this will hurt VRSN, but the legal language and the stakes involved are too high to surmount nor even change for the small potential benefit it brings.
I’m buying shares.
Valuation
On a trailing PE multiples basis, the average for such a stable business is typically a decent place to look for a “return to the mean” type of play. If you do trust in that, then it looks like over the past 5 years, VRSN has traded around 32x earnings and its current of 21.8x earnings indicates a 50%+ total return.
With the November contract renewal coming up just 4 short months away, it does seem like a rather simplistic setup.
Verisign has the rare capacity to grow earnings faster than revenues and do it while returning virtually all profits to shareholders. In 2023, VRSN generated $853.8 million of net cash. $901.4million was used to repurchase shares. Shares over time have been reduced by 15% since June 2019.
Shareholder yield is around 5%. Return to normal valuations will add 50%. Even a renewal of contract without significant step up in prices will mean an additional 6 years of high free cash flow generation.
Given the now de-risked multiple, I don’t see a reason not to invest at current prices.