Verisign Price Hikes Not Good for its Stock

Verisign's product price hikes might be beneficial in the short term, but probably aren't sustainable.
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By Trefis.com

VeriSign

(VRSN) - Get Report

holds exclusive rights to register .com and .net Internet domain names, which account for about half of all domain name registrations. The company recently announced that it was raising its prices for .com and .net registrations.

Although these price hikes might benefit VeriSign in the short term, we don't think they are sustainable. Over time we expect higher prices to reduce demand for .com and .net domains.

Based on this news, along with VeriSign's second-quarter results and the recent strategic sale of its SSL and authentication business to

Symantec

(SYMC) - Get Report

, we have reduced the

Trefis price estimate for VeriSign's stock

from $35.73 to $35.28. Our analysis follows below.

Rate increases may help VeriSign now

...

The average price that VeriSign charges to register a domain name has risen by roughly 3% a year on average in recent years, from about $6 in 2007 to around $6.40 in 2009. VeriSign recently raised its .com registration price by 8%, from $6.80 to $7.34. The .net registration price went up by 10%, from $4.23 to $4.65.

Net .com and .net domain name additions have showed healthy growth recently. VeriSign registered about two million .com and .net domains in each of the past two quarters, off a base of around 100 million registrations. We believe that this growth will help VeriSign maintain its total proportion of .com and .net registrations at around 50% for the rest of 2010.

The total proportion of .com and .net domain names fell from 52.5% in 2007 to around 50% in 2009, as country-specific domains (such as .cn, .uk and .de) grew in popularity. We expect this proportional decline to continue, reaching 44% by the end of the Trefis forecast period.

However, there could be an upside of 10% to our price estimate if VeriSign manages to maintain .com and .net registrations at around 50% of total registrations over the course of our forecast period.

You can drag the trend-line in the chart below to create your own estimate and see how it affects the company's share value:

But higher prices will probably reduce future demand for .com and .net domains

.

Although VeriSign's price hikes may boost short-term cash flow, we find them aggressive and potentially unsustainable. While we expect the overall proportion of .com and .net domains to remain constant for the rest of 2010, higher prices could limit their popularity in the long term.

In the event that domain registration price growth exceeds our expectations, reaching an average price of $10.80 by 2016, there could be an upside of 20% to the

$35 Trefis price estimate for VeriSign's stock.

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