The Digital World 200SeekingAlpha commented recently on the performance of VeriSign.  The company is a leader in domain names and Internet security, which powers the invisible navigation that takes people to where they want to go on the Internet.  

SeekingAlpha stated that VeriSign’s shares have performed well in recent years, but analysts expect future earnings growth to slow somewhat.

  • The company has a virtual monopoly in the internet infrastructure sector (where it operates the domain name registry), leading to staggering margins and returns on capital.
  • However, its shares appear fairly valued and without a dividend yield, they do not appear to be a compelling investment opportunity at the current time.

Verisign Stock Chart 31167205-14184210857090578-Stock-Market-SherpaIt is not really an exaggeration to say that VeriSign (NASDAQ:VRSN) more or less runs the internet. The company operates domain name registry services (.com, .net, .org, .edu, .gov, etc) so that people can find websites such as SeekingAlpha.com. While the corporation itself is not well known, its operations are critical to every internet user. The stock has achieved steady gains over the past several years as you can see from the chart below. This article focuses on VeriSign’s fundamental attributes to determine whether more upside potential exists for shareholders or whether the stock has become overvalued at its current price.

Please click here to read SeekingAlpha’s article which outlines the DRAG analysis framework in more detail.  To summarize, the four variables used in a DRAG (dividend and risk adjusted growth) analysis are as follows (each company is ranked from 0 to 3 in each category):

1) How cyclical is the industry in which VeriSign operates?
2) How strong is VeriSign’s competitive position within this industry?
3) How risky is VeriSign’s balance sheet?
4) What is VeriSign’s dividend yield and dividend growth history?

The premise is that a company that operates in a non-cyclical industry, with a strong competitive position and a clean balance sheet that pays an attractive dividend should trade at a higher earnings multiple than a company without these attributes, even if the lower quality company has higher projected future earnings growth. After adjusting for these variables, it becomes easier to compare companies in different sectors with different levels of future growth potential.

Source:  SeekingAlpha