Why Did Buffett Buy Verisign?

Warren Buffett has been called many things – but a buyer of tech stocks was never a nickname given to this tycoon of the stock market. That is until 2016 when the Oracle of Omaha first bought shares in Apple (AAPL). At that time, this purchase was on the lips of every investor – even though Buffett had bought a significant holding in IBM (IBM) back in 2011.

In addition to Apple, Buffett’s portfolio, Berkshire Hathaway (BRK-A & BRK-B), also recently snapped up shares of cloud services provider, Snowflake (SNOW), during its IPO.

It’s not tech stocks per se that caught Buffett’s attention. Rather, it’s businesses that promise a high return on capital. His preference for companies that generate high returns on invested capital (ROIC) is evident from stock purchases such as American Express (AXP), Coke (KO), and Apple (AAPL).

You’ll also notice that merely having high returns on capital is just one aspect of a company that Buffett scrutinizes. Many business can spike their returns for a year or two if they want. That’s relatively simple – what’s not so simple is finding companies that consistently produce high capital returns for five, 10, or even 20 years. That’s quite a bit more challenging. Compounding that challenge is the fact there are very few companies who succeed at this and, when it comes to stock pricing, many aren’t priced appropriately.

Think of it – a well-managed, sought-after company, that yields high returns on capital, and does so consistently? It’s the equivalent of searching for the Holy Grail. Needless to say, this search is complex. However, Buffett has proven he has a rare ability to ferret out these hidden gems.

Even in the tech sector.

But in the grand scheme of things, the tech sector is a newborn compared to other sectors that Buffett has historically favored. It’s really only begun to grow exponentially over the past couple of decades.

Prior to the 2010s, many tech companies were viewed with skepticism after the 2000 bust. Many of the world’s very first tech startups aren’t even around anymore, much less have recognizable names. On the flip side, though, even some more well-known tech companies lost the race in the 2000s.

The complexity of the sector and unknown unknowns historically caused Buffett to shy away from snapping up firms. For the majority of his trading career, tech has been a challenge, making it much easier to look elsewhere for the deals he’s made.

But one such deal came from the very sector he’d made a point to avoid.

Enter Verisign (VRSN).

Does Buffett Own Verisign?

Buffett has had a stake in Verisign since 2013. before delving into Warren’s shares, let’s learn more about this tech company.

What does Verisign do?

Verisign is the leader in domain name registration and internet infrastructure services.

The company plays a critical role, albeit mostly invisible to the general public – the company helps maintain the overall security and stability of the internet and Domain Name Systems, or DNS.

The company’s behind-the-scenes activities help keep the world online and connected – safely – every day.

How Much Verisign Does Warren Buffett Own?

There are just nine stocks owned by Buffett for which Berkshire Hathaway (BRK.B) owns the most stocks of any shareholders. Verisign is one of these nine stocks.

Buffett currently holds 12.8 million shares. As of August 31, 2021, Verisign’s closing price was $216.15, making his shares worth around $2.77 billion.

It doesn’t appear that the current global climate has affected the share prices of Verisign negatively. While the company pays no dividend, analysts expect share prices to climb.

What Did Berkshire Hathaway Pay for Verisign?

While the current (at time of writing) share price for Verisign is just over $216 per share, when Berkshire Hathaway purchased its first shares of this tech stock in 2013 (subsequent shares were purchased in 2014), the price-per-share hovered around $45 to $50 with a market capitalization of around $7-8 billion.

Today Verisign’s market cap is three times as high as it was when Buffett first bought in, but the stock’s underlying fundamentals aren’t three times as valuable.

Why Did Buffett Buy Verisign Stock?

Given the nature of Verisign’s industry, a better question is why wouldn’t he?

There are several reasons Buffett originally purchased Verisign, not the least of which is the fact that the internet isn’t going anywhere.

In fact, while it couldn’t have been foreseeable in 2013, today’s world of work has shifted. More people are working from home and even those still working in the office require internet connectivity.

Online business and ecommerce – which has thrived in the face of a global crisis – require security and safety. With the boom of entrepreneurs starting online businesses in recent years, the need for websites, domain names, and the infrastructure that supports them shows no signs of slowing.

Verisign’s growth potential in the near future is palpable. Even if the world returns to some semblance of normalcy in the coming months and years, a drop in demand for domains doesn’t appear likely.

Is Verisign Stock a Good Investment?

For the five years from 2016 to 2020, Verisign’s annual revenue has steadily increased:

• 2016: $1.14 billion
• 2017: $1.16 billion
• 2018: $1.22 billion
• 2019: $1.23 billion
• 2020: $1.26 billion

Revenues for the first two quarters of 2021 are strong – should they continue, Verisign could break $1.3 billion for the year. Diluted earnings per share rose to $7.07 for 2020 – up from $5.15 in 2019. Verisign’s cash position is strong at $1.2 billion.

The bottom line: Verisign is a sound investment.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.