Verisign Gets Registry Pact

Shares of VeriSign(VRSN Quote) bucked a down market Tuesday on news it landed a contract to manage a directory for radio-frequency identification tags.

Shares of VeriSign recently gained 77 cents, or 4.1%, to $19.50, while the Goldman Sachs Software Index fell 2.2% to 158.53.

Investors were clearly encouraged by Mountain View, Calif.-based VeriSign's announcement that it had been selected to operate the directory for RFID tags, a next-generation bar code that stores product information. Wal-Mart(WMT Quote) and the Department of Defense have set a goal for some suppliers to use RFIDs by 2005.

EPCglobal, a not-for-profit standards organization, chose VeriSign to operate the directory, which will be part of a system using existing Internet infrastructure to create a low-cost, standards-based set of services for trading partners to use RFIDs to share information.

Under a government-approved monopoly, VeriSign already operates the registry -- or directory -- of domain names ending in ".com" and ".net," directing Internet users to the correct address. VeriSign will tap its database technology to create a similar director to handle the expected billions of lookups of RFID tags.

Financial terms of the agreement were not disclosed, and VeriSign does not expect the deal to affect 2004 financial results.

Despite all the hoopla surrounding RFID, analysts warned investors not to get carried away by the news -- especially given VeriSign's current valuation. Sell-side analysts don't expect VeriSign to derive any meaningful revenue from RFID until 2005 at the earliest and possibly not until 2006 or 2007.

"We would caution investors not to get too blown away by the hype," Goldman Sachs analyst Sarah Friar wrote in a note late Monday, after the Associated Press reported the deal. "In our view, expectations may have crept ahead of fundamentals."

Given the lackluster 7% revenue growth she expects in 2004 and valuation at 32 times her 2004 earnings estimate, Friar said the stock's 14% appreciation since Dec. 1 -- before Tuesday's run -- may be too much too soon. Friar has an in-line rating on VeriSign and her firm has done banking with the company.

Merrill Lynch analyst Ed Maguire echoed those sentiments. "We regard today's announcement as a strategic positive for VeriSign," he wrote in a note. "However, we are careful to project overly aggressive expectations into our outlook.

"Over time the company has excelled in vision, but many of its initiatives have not always delivered on their promise," Maguire added. He has a neutral rating on VeriSign and his firm has done banking with the company.