This is not investment advice and does not consider your financial situation. Do your research before taking any positions in the securities listed below.
It has been several months since I last posted an article as work, life & generally an elevated market have gotten in the way.
Nonetheless, with my small readership, I want to get more consistent in posting about small to mid-caps in Aus & US only. In this series, I will cover:
$VRSN - Why I think the low-growth internet monopoly is attractive at c.$175ish as buybacks continue but worth remembering China issues will persist
$AD8 - How this is attractive closer to a $500m EV (30% cheaper) and a reminder that opex savings are more important than video revenue in the shorter-term
$TAH - Reasons why this CEO hire does not stop this being a value trap as well as the operational milestones I'd like to see before it is worth buying
$DMP - Reminder of why it is an inferior business to $DPZ, but it may very well not matter for why it is worth considering
#1 $VRSN - A defensive that has traded down from China exposure, Insider Selling & slow general domain growth
The main reasons I imagine the share price has been under pressure lately are:
Insiders (mainly Bidzos & Strubbe) have sold down >80,000 shares over the last 6 months. Correspondingly, institutional flows have been negative
There has been concern over Top Level Domain (TLD) growth in Q1’24. In particular, weakness in China is focus given it accounts for 6% of revenue. Note – there is no evidence that Chinese government is moving registrars away from .com.
Longer term – higher use of applications may lead away from Domain use – particularly if AI tools are not directly answers without directing traffic to the websites (i.e. therein lowering the need for domains)
The way I look at this business needs marginal volume growth
Domain volume growth --> approx 2%
Revenue growth --> approx 4% (noting $VRSN have c.75% retention)
NPAT growth --> approx 7% (driven by a continued/slow reduction in FTE costs)
EPS growth --> approx 9-10% (assuming a good growth of share)
Consensus EPS growth is 7.25% (marginally below historical run-rate) due to the following
Rate of buybacks has slowed (acquiring <3% of outstanding each year)
Their contract negotiations with ICANN are at lower values (e.g. the .net renewal was at a lower value)
There is weaker sentiment towards China (as noted above)
Hence why the multiple is relatively contracted
They have $1.1bn of authorised repurchases and c.$900m in the bank
So overall, I consider an entry point around $170-175/share completely acceptable because
Similar to the relationship The Lottery Corp (Aus) has with the Australian states, ICANN benefits from $VRSN's operational capability (e..g 100% availability) and the operational risk of handing this over to an unknown operator is high
There are in-built price increases in the presumptive renewals with ICANN
They have the spare funds to buyback more given the stock has fallen
Consensus assumes margin contraction, despite the fact they have seen some margin growth (from 63% to 67% in last 5-years)
Net net, this stock probably won't make you rich with its 5% p.a. topline growth and smallish margin expansion - but its monopoly, lower share price and share buyback capability is the appeal so I'll continue to buy at $170-175ish mark.
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