VeriSign Firing On All Cylinders

First, the big news: GDP grew at a 0.7% rate in the second quarter, less than the 1.2% rate forecast by economists. The economy continues to slow, but is still growing. However, if not for strong consumer spending in April, that number might very well have come in negative. The futures are mixed on the news.

And now for our regularly scheduled programming.

Who says growth is dead?

VeriSign blew away estimates last night and is trading 10% higher this morning, one of a few Internet companies to accomplish that feat in the last couple of days.

VeriSign reported pro forma earnings of 25 cents a share, 11 cents better than estimates, and raised forward guidance.

However, watch for those writedowns. VeriSign took an $11.2 billion loss for the quarter – $2 billion more than its market cap – including a $9.9 billion writedown of goodwill for stock-based acquisitions. That essentially means that VeriSign believes it won’t recover what it paid for those acquisitions. But the biggest writedown yesterday – and a record for a U.S. company – was JDS Uniphase , which recorded a $50.6 billion loss for the year, including a $38.7 billion writedown. JDSU has a market cap just above $10 billion, based on this morning’s price of about $8 a share.

VeriSign is trading at about 78 times this year’s pro forma estimates, and 46 times 2002 estimates. That’s a steep valuation for a company with a projected two-year growth rate of 25%, but if VeriSign can continue to blow out estimates, that picture could change. And like many other companies, it needs to begin to report real earnings, not pro forma ones.

But VeriSign is that rare company that is firing on all cylinders, with sequential growth across all divisions. And most importantly, let’s not forget that VeriSign still has the market cornered on domain name registry. In a hopeful sign for the future of the Internet, domain names continue to be registered and renewed at record rates. And those domain names are increasingly being registered by real businesses for real business applications, not by speculators.

A look at VeriSign’s chart indicates that the stock looks a little toppy. It broke down out of a head-and-shoulders top at 50 last week, with downside potential to the low 30s, based on the 18-point size of that pattern (see chart below). However, the stock could negate a bear flag this morning, a hopeful sign, and a move back above 60 would make the technical picture much better.

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