Why Is Buffett Buying Verisign?

Warren Buffett has spent 2024 stockpiling cash, even going so far as to sell off sizeable pieces of some of his largest investments. Recently, though, Berkshire Hathaway announced that it had made some modest acquisitions, including the addition of nearly 388,000 shares of domain name registry service Verisign (NASDAQ:VRSN).

These purchases brought Berkshire Hathaway’s holdings in Verisign to 13.2 million shares, accounting for about 13.6% of the company as a whole.

Why is Buffett buying Verisign now, and what about this business has helped to bring the Oracle of Omaha off the sidelines of the market?

Is Verisign a Value Play for Buffett?

When Warren Buffett buys a stock, one of the most obvious things to look for is a low valuation. This, however, doesn’t hold entirely true in the case of Verisign. The stock currently trades at 27.2x cash flow and 12.7x sales.

While Buffett is known to pay little attention to EBITDA, the ratio of enterprise value to EBITDA of 19.1 also makes the stock look quite expensive.

While Verisign might not look like a spectacular value, it’s at least worth mentioning that the stock hasn’t followed the skyrocketing trend of other tech stocks in 2024. VRSN shares have actually fallen by 1% in the last year, bucking the trend of many tech stocks that delivered double-digit returns.

What Might Buffett See in VRSN?

With an unusually low valuation ruled out, we have to ask what other characteristics of the business might appeal to Buffett.

One of the first possibilities that suggests itself is Verisign’s extremely high level of net profitability. For the 12 months ending in Q3, the company reported a net margin of 55.7%. This was far from unusual for the company, as net margins at Verisign have consistently held above 45 percent since 2018.

Closely tied to the appeal of Verisign’s high net margin is the fact that the company is still delivering at least a moderate level of revenue growth. In Q3, Verisign’s revenues rose 3.8% year-over-year to $391 million. Net income, meanwhile, came in at $201 million compared to the $188 million reported a year earlier. Thanks to its high margins, Verisign can capitalize on even modest revenue growth more than the vast majority of other companies could.

Exploring Verisign’s Moat

So far, Verisign has appealing financials but far from incredible valuation. On its own, the company’s performance doesn’t seem to explain why Buffett would want to own nearly 14% of the company. The decision to buy new shares looks much clearer, however, when VeriSign’s unique competitive advantages are taken into account.

Verisign acts as the exclusive registering entity for .com domain names, a status that allows it to earn small but very high-margin fees from a large swath of the total internet. As of its Q3 report, Verisign had nearly 170 million registered websites using the .com and .net domain name extensions.

VeriSign’s monopoly over .com extensions is essentially guaranteed by the US government, which regulates its relationship with the Internet Corporation for Assigned Names and Numbers (ICANN) much like a public utility. As such, unless government regulations change, Verisign will almost certainly continue to control .com registrations for the foreseeable future.

Verisign is even more tied to the inner working of the internet by virtue of operating two of the thirteen Root Servers that support the internet’s domain name system (DNS). Verisign operates the a.root and j.root servers, making the company absolutely integral to the internet’s normal functioning.

In October, Verisign also closed an agreement to continue operating as the DNS’ Root Zone Maintainer for another eight years. The company has held this role since 1993, and it seems unlikely that it would lose this prestigious position at the heart of the internet’s day-to-day functionality anytime soon.

Putting all of this together, it’s safe to say that Verisign enjoys one of the strongest moats of any tech company out there. While companies like Alphabet, Amazon or Microsoft are undisputed leaders in their fields by virtue of creating universally popular products and services, Verisign operates with what amounts to a government-granted monopoly over a large part of the fundamental workings of the internet itself.

So, Just Why Is Buffett Buying Verisign?

Buffett is likely buying Verisign because its moat is virtually guaranteed to persist due to operating as the DNS’ Root Zone Maintainer for another eight years.  

Once Verisign’s moat is taken into consideration, it’s not so hard to see why Warren Buffett is so interested in buying up more of this company. Berkshire Hathaway first started buying Verisign in 2012 at an average price of $41.62. Before the transactions in December, the company hadn’t acquired any new shares of VRSN since 2014. While Buffett certainly can’t get the kind of deal on Verisign he was 10 or 12 years ago, the company seems to have as much to recommend it as ever.

The last several years have done nothing to weaken the company’s moat, as Verisign is just as important a component of the global internet as it ever was. Despite this, Verisign has shown itself totally resistant to the growth-fueled price surges that many tech companies have experienced recently. By remaining flat over the last year, Verisign has started to look like a comparatively good value when measured against the broader market.

This is especially true when one takes into account the fact that earnings have grown even as prices have plateaued. Right now, VRSN trades at around 23.8x trailing 12-month earnings. Although this is still fairly high, it’s lower than the ratio for Verisign has been for most of the last several years.

A final consideration that may appeal to Buffett is the fact that Verisign has also been aggressive in returning cash to shareholders through buybacks. As recently as the end of 2019, there were about 119 million shares of VRSN outstanding. Today, that number is down to 97 million. Q3 alone saw the number of outstanding shares drop by about 5.8 percent year-over-year.

In buying Verisign, Buffett is likely taking advantage of the opportunity to buy a company with incredible long-term competitive advantages at a more or less fair price. As long as the internet continues to operate on its current infrastructure, there’s little reason to think that Verisign will lose its moat or see its revenues significantly decline. With its extremely high margins and market position, it seems likely that Verisign will remain a strong company for many more years to come.

---

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.