VeriSign May Face More Downside

Its shares are down 56% this year, trading near their 52-week lows. Hardly a stirring performance, but in the Great Ticker Meltdown of 2000, many more large-cappers have fared considerably worse (Yahoo and Amazon.com, just to name two, have dropped 82% and 68%, respectively).

And that’s the problem with digital certificate and Internet services provider VeriSign . In a market where investors are desperately seeking big-cap bouncebacks, VRSN still appears to have potential downside.

With a current market capitalization of $16.8 billion, VeriSign is valued at 54.9x trailing 12 months’ revenues of $305 million. Compare that to the two fallen giants mentioned above. Yahoo’s valuation is 21.7x TTM revenues – down from 65.8x in late September – while AMZN’s value is 3.6x.

For investors looking to bet on a large Internet services player, shares of Exodus Communications , at 16.1x TTM revenues, also come a lot cheaper than VeriSign, while ad services market leader DoubleClick , whose shares have plunged 90% this year, carries a valuation of 3.5x TTM revenues. Since all three are losing money, it seems hard to justify VRSN’s premium.

Maybe it would be more appropriate to compare VeriSign – whose core business of digital certificate technology was augmented last summer through its purchase of domain registrar and Internet services provider Network Solutions – to another security powerhouse, VPN market leader Check Point Software Technologies . CHKP’s valuation is 45.1x TTM revenues, not much more inflated than VeriSign’s.

But Check Point is profitable, and has been every quarter going back through 1997. VeriSign has lost money in the past three quarters, though part of the reason for VRSN’s $6.78 per share Q3 net loss was due to the $15.3 billion Network Solutions acquisition.

In fact, on a pro forma basis, VeriSign had net income for Q3 of 18 cents per share, blowing away street estimates. And with the addition of the world’s leading Internet domain registrar has come its largest revenue stream. Network Solutions had $98 million in revenue in this year’s first quarter, more than twice what VeriSign generated on its own ($41 million) in Q2, when the merger was completed. Once the costs of the Network Solutions deal are fully absorbed, it’s a money machine.

VeriSign doesn’t bear the brunt of investor fears that an advertising slowdown will strangle the ‘Net economy, as do Yahoo and DoubleClick. Nor does it face skeptical questions about its ability to ever turn as profit, as does Amazon.com. Rather, it appears well-positioned in two big markets – digital authentication and basic Internet services – and capable of sustained profitability.

In October one analyst set a price target for VeriSign of $300 per share. It closed Friday at $84.88. I like the company, but not at its current level, and I think shares will hit $30 before they ever see $300.