One of the most interesting holdings in the
Berkshire Hathaway (NYSE:
, which specializes in domain names and internet security.
What makes the company interesting is that VeriSign is a tech
company and Warren Buffett famously said that he doesn't invest
His stock picking prowess has made him arguably the greatest
investor of all-time, and when Berkshire buys something, other
investors want to get in on the action. So when Buffett
contradicts himself, it is worth taking note.
He prefers to stick to financials, railroads and companies he
can easily understand. Technology is not his thing.
What many investors might not know is that Buffett, at 83
years old, is grooming two men to take over when the time is
right. And the purchase of VeriSign is indicative of the changes
Ted Weschler or Todd Combs are making behind the scenes at
So let's take a look at the two Berkshire-teers' unorthodox
VeriSign has worked hard to build a strong moat against
competitors by accruing exclusive contracts with ICANN, a
nonprofit that administers policy for the internet name and
address system. However, shares of VeriSign are down about 8% so
far this year amid uncertainty related to the U.S. Department of
Commerce's plan to relinquish control of ICANN.
This hasn't stopped Berkshire Hathaway from increasing its
stake in the company. Last month, Berkshire bought an additional
1.29 million shares, bringing its total stake in the firm to
almost 13 million shares. Berkshire now owns just over 10% of the
After VeriSign's earnings report last month, it's easy to see
why Berkshire upped its stake. VeriSign earned $0.68 per share in
the second quarter, beating estimates by 6.3%. VeriSign added
420,000 domain names in Q2, which brings the total to 128.9
million domain names, an increase of 3.7% from last year.
For the current quarter, VeriSign expects to add between
600,000 and 1.1 million net domain names. This is good news
because more domain names equates to higher revenues.
VeriSign has a very profitable business that generates a
tremendous amount of cash. Free cash flow -- the amount of money
a company has left after making capital expenditures -- is a
great way to analyze a business.
Over the trailing twelve months, VeriSign generated $437
million in free cash flow. That puts its free cash flow yield
(free cash flow per share divided by share price) just above 6%,
which is right in-line with the cash flow generating giant Apple
Free cash flow is used to buy back shares or pay dividends. In
the second quarter, VeriSign spent $300 million on share buybacks
and has to ability to repurchase a total of $1 billion worth of
shares, which would reduce its outstanding shares by 14%. Aside
from free cash flow, VeriSign has an additional $1.5 billion in
cash on its balance sheet to fund buybacks.
Shares of VeriSign look cheap for a tech company. Its PE
(price-to-earnings) ratio is only 14, while the tech industry
average is closer to 45. VeriSign also has one of the highest
operating margins in the business at 55%. The industry average is
Despite this, shares are down 12% from their 52-week high back
in January and are down nearly 80% from its all-time high in the
Risks to Consider:
VeriSign faces a lot of competition in the domain registry
business. The company competes with the likes of GoDaddy and
other operators. All of which want to capture VeriSign's business
and reduce its leading market share.
Action to take -->
Verisign is uniquely positioned in the web space. It has
contracts with regulatory bodies that give it a competitive
advantage and it should benefit from the increasing need for
companies to have a web presence. Investors should purchase
shares of VeriSign and take a buy-and-hold approach that Warren
Buffett preaches. This is the path either Ted Weschler or Todd
Combs will likely take with Berkshire Hathaway's stake in
If the Berkshire buy-and-hold approach appeals to you,
then you might want to learn about "Forever" stocks
. These are world-dominating companies that pay investors a fat
dividend, dig a deep moat around their business to fend off
competitors and buy back massive amounts of stock, which boosts
the value of remaining shares. They're solid enough stocks to
buy, forget about and hold "Forever." To learn more,
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