VeriSign Slumps On Prevention Of Automatic Price Increases

Shares of VeriSign (VRSN) were plunging more than 14% in morning trading on news that the U.S. Department of Commerce approved the renewal of its agreement to serve as the authoritative operator for the .com registry with the Internet Corporation for Assigned Names and Numbers, but it’s ability to raise prices is limited.

Per the agreement, VeriSign can serve as the registry operator for the next six year; however it no longer has the right to four automatic price increases of up to 7%. Now, any price increases have to be �limited to circumstances based on the imposition of new Consensus Policy or extraordinary expenses related to security or stability threats,� and the Commerce Department must sign off on them.

Its current pricing of $7.85 per domain name registration will continue throughout the term, although the agency could remove price restrictions entirely, if the company can demonstrate they are no longer warranted.

Wells Fargo�s Gray Powell reiterated his Outperform rating, writing that stock�s valuation is attractive and that he was pleased that the company had retained its $7.85 rate. Still, the lack of increases will have an impact: �Given that .com equates to 85% of VRSN’s domains – the lack of price increases impacts top line growth by about 4%. As a result, we would expect total company revenue growth in the 7% range going forward vs 11% previously. Both estimates do not factor in the potential benefit of new gTLD’s – which could easily add just over 100 bps to growth starting in late 2013.�

Citi�s Walter Pritchard was more cautious, reiterating his Hold rating, noting that the stock is worth $35 under a flat-pricing scenario: �As we published in Oct, our DCF-based analysis derives a value of $35 for VeriSign, assuming 4% medium-term (through 2017) unit growth and 2% long-term unit growth. This scenario now becomes our base case and we are adjusting our price target to $35. If medium-term /long-term unit growth were to be 6% / 3% (higher), this would drive a $41 share price and at 2% / 0% (lower), this would drive a $29 share price.�