Verisign, Inc. (NASDAQ:VRSN) saw Point State Capital increase its stake by over 150% per a 13G filing with the SEC last week. Point State now owns over 4.6 million shares, or about 3% of Verisign’s outstanding shares. This is a slight pivot from the third quarter when Point State sold off 33% of its Verisign shares. Sean Cullinan founded Point State in 2010 with six former Duquesne Capital portfolio managers, and focuses on a global macro strategy. Verisign is also one of billionaire Julian Robertson’s favorite picks (check out Julian Robertson’s new favorites).
Verisign is also one of billionaire Stephen Mandel’s top picks, and was a new position for him in 3Q, good for around 2.8% of his 13F. Mandel is one of Julian Robertson’s “tiger cubs” that left Tiger Management in 1997 to found Lone Pine Capital.
Verisign had seen uncertainty in its shares over the past few months as the Department of Commerce contemplated the renewal of its contract to oversee .com registries. The DOC recently approved Verisign’s renewal, with a big caveat – the Internet service company cannot raise prices. This put the stock down over 10% during the last month and it now trades around $36 a share. Verisign will keep its current pricing of $7.85 per domain for the duration of its six-year contract, but without price hikes – four price increases by up to 7% – that its previous contract allowed.
The Internet company remains the leading provider of web registry services for .com and .net domains, with over 105 million .com domains and 5 million .net domains in its portfolio. Verisign is currently able to bring in $7.95 per year per domain name, allowing for solid reoccurring cash generation, and it expects revenues to be up by 10% in both 2012 and 2013. The company’s long-term growth rate following the contract renewal drops from a previous 20% CAGR to a revised 16%.
Verisign has no perfect competitors, but other key service-based tech companies include Yandex NV (NASDAQ:YNDX), Red Hat, Inc. (NYSE:RHT), Akamai Technologies, Inc. (NASDAQ:AKAM) and Equinix Inc (NASDAQ:EQIX). Yandex recently posted guidance that current FY revenues should be up 40% year over year. The Russian search company owns around 60% of its respective market, while trading above top peer Baidu at 30x earnings, compared to Baidu’s 20x multiple. Despite its high P/E, Yandex’s forward P/E comes in at 20x and its robust 30% expected EPS growth rate brings its PEG below 1.0.
Red Hat is the open source software provider that is up almost 20% year to date. Despite its high P/E ratio of 60x, its forward 30x brings it more in line with the industry. Red Hat was a new position for billionaire Jim Simons during 3Q (check out Jim Simons’ top picks here).
Akamai is expected to see revenues up 17% in FY2013 after an increase by 25% in FY2012 following increased server sales. Virtualization and cloud computing infrastructure will drive growth thanks to companies upgrading their IT. Akamai is creating solid growth prospects via acquisition, having made $900 million in acquisitions since 2005; the company recently bought Contendo for $280 million to expand its technology and customer base. Akamai was a big bet for Ken Griffin – billionaire investor and founder of Citadel Investment Group – who increased his stake by 500% last quarter (see Ken Griffin’s newest picks here).
Equinix should be able to grow nicely with its data center operations, mainly due to a rise in the amount of capital companies allocate toward IT. Our one hesitation is Equinix’s excessive valuation. The data center company trades at a 70x trailing P/E and a forward P/E that still puts it above its peers at 50x. Even with its long-term expected EPS growth rate above 25%, we remain cautious.
In Mandel’s downside scenario for Verisign – which included the DOC’s decision to disallow price increases – he still sees 2013 EPS to come in at $2.50, which is 15% above current consensus estimates. We believe that Third Point likely has a similar thesis and took the recent selloff as overdone. Verisign currently trades well below the other Internet peers listed at only 22x trailing earnings and 17x forward earnings. The company boasts a solid balance sheet and cash flow generating abilities. Its $1.5 billion cash position should help with dividends; it already made a $2.75 per share special payment earlier this year.
