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Geoffrey Beard, an analyst with Thomas Weisel Partners, reiterated his "strong buy" rating on Oct. 10, when the stock was at $195 a share. (It's now around $155.) Setting a price target of $250 a share, his report's headline blared: "VRSN may be undervalued by 20% at current levels." Now he says: "The stock is getting cheaper every day." "INFRASTRUCTURE GORILLA." Beard isn't alone. Several analysts have reiterated "strong buy" ratings recently, even as the stock, along with the Nasdaq, has slipped lower. "I view it as the emerging Internet infrastructure gorilla," says Todd Raker, an analyst with Credit Suisse First Boston, who reiterated his "strong buy" rating on Oct. 17. Raker argues that the company's current business, which he expects to generate $1 billion in cash flow next year, is the base for an expanding set of services to Web sites (see "The Web's Virtual Vault: VeriSign," BW e.biz, Oct. 23). "It's a little aggressive to put it in the same bucket as Cisco or Microsoft now," he says. "But in three to five years, it has that potential." Despite VeriSign's recent slide toward $150 a share, calling the stock cheap is still pretty bold. It tripled in price last year and has a market cap of about $30 billion. The company is profitable on a cash-flow basis -- which, for an Internet company, is saying something. But it's expected to earn about $60 million pretax, or 23 cents a share in 2000, giving it a price-to-earnings ratio in the 800s, so high as to be basically irrelevant. IN GOOD COMPANY. VeriSign is due to report third-quarter results on Oct. 25, and consensus estimates are for 6 cents a share, up from 2 cents for the same quarter a year ago. On a price-to-sales basis, a more popular way to compare prices of fast-growth stocks, the stock is trading at about 30 times next year's sales -- roughly in line with other expensive Internet software makers, such as Ariba, Veritas, and Software.com. But analysts say those comparisons miss an important point. VeriSign runs a subscription business, both through its Internet-registry unit (the former Network Solutions, which VeriSign recently acquired) and its security-services unit. Customers pay for services up front, even though accounting rules require the company to spread the recording of those revenues over the life of the contract. Currently about 60% of VeriSign's stated revenues each quarter are from deferred revenues, estimates Chuck Jones, an analyst with Salomon Smith Barney. Since VeriSign's revenue growth is accelerating, the accounting method has the effect of making reported sales growth seem a bit less than it actually is and making the stock seem more expensive. VeriSign's true cash sales will be $1.3 billion to $1.5 billion next year, lowering its cash-to-sales valuation to the 20s, Raker says. "It's more reasonably priced than people realize." COMFORTING CASH. When you evaluate the company on the basis of operating cash flow, "it is not really a highly valued stock," agrees Christopher Bonavico, portfolio manager with the Transamerica Premier Aggressive Growth Fund. "It is much more relevant to value any company on the basis of the cash that is available to shareholders. With that kind of cash flow, it is very attractive." While other analysts are more cautious about giving deferred revenues the same weight as reported revenues, they agree that this aspect of VeriSign's accounting policies is a benefit to investors. "It gives investors additional visibility," says Mark Fernandes, an analyst with Merrill Lynch. Even if business were to start to dry up, VeriSign already has a big chunk of future revenues in hand. "It gives people a comfort level that the revenue growth that they are expecting is really going to come to fruition," Jones agrees. Other analysts, who agree investors are selling VeriSign because of ill-founded concerns about its valuation, judge it cheap based on projections for the company's growth. Beard expects VeriSign to increase sales 50% through 2005 and 35% after that, generating huge amounts of cash. "Over the long term, cash is king," Beard says. Jones puts his faith in CEO Stratton Sclavos to turn VeriSign into one of the key Internet infrastructure companies in the long term. "If he can pull that off, we're looking at a company that could have a $100 billion-plus market cap," Jones says. "A MUST-HAVE." Of course, that's assuming the Internet keeps growing at a fast clip. One reason the Nasdaq has fallen in recent weeks is concern that companies' purchases of Net software and services will slow because they feel less competitive pressure from ailing dot-coms. Verisign's Web-site domain registry currently provides about 70% of its revenues, Jones says. But Beard argues that while traditional companies may not rush to implement Web strategies with the same urgency they felt earlier in the year, they'll still do it. "It will occur in a more thoughtful, prudent fashion," he says. "Security is a must-have." Although VeriSign is well off its temporary high of $258 a share last March, it has held up relatively well in the Nasdaq's bear market. "In a real market correction, all these valuations have to come down," says Robert Burgoyne, technology strategist with Monument Funds, which owns VeriSign stock through its Internet fund. So far, high-end Internet software companies such as VeriSign have avoided the worst of the carnage, but a bad announcement from the industry group could hurt them all. In this environment, VeriSign is not for the faint of heart. "It's very volatile and very difficult to try and judge if you can get in cheaper," Raker says. "My view is that you should buy now and put it away, and you'll do just fine." Stone is an associate editor at Business Week Online EDITED BY BETH BELTON |
