Verisign Earnings: Weak Demand in China Continues to Weigh on Near-Term Growth; $210 Fair Value Estimate Unchanged

We maintain our $210 fair value estimate for wide moat Verisign VRSN following a mixed third quarter 2023 result. The near-term outlook for the .com and .net domain name base continues to be hindered by soft registration demand in China stemming from increasingly stringent and burdensome local internet regulation, as well as economic headwinds and a weaker local currency. While these headwinds were partly offset by healthy demand and signs of resilience in excluding China markets, we have marginally trimmed our full-year forecast to align with updated guidance. Our longer-term forecasts and valuation are broadly unchanged, although we now assume more subdued domain base growth in the near term, offset by a sharper recovery from 2025. At current prices, Verisign shares screen as fairly valued.

Top-line growth of 5% during the third quarter was marginally below our expectations as soft domain name base growth was offset by further realization of domain price increases. New .com and .net registrations were flat year on year at 9.9 million However, weak demand from China weighed on the .com and .net base, which declined sequentially by 0.5 million, and 0.3 million year on year to 173.9 million. Despite demand headwinds, Verisign achieved a better-than-expected 130 basis points of margin expansion, reflecting upside from price increases and prudent cost control.

For full-year fiscal 2023, we have marginally trimmed our domain registration growth from 0.5% to flat year-on-year growth, at the midpoint of updated guidance. As a result, we lower our top-line growth forecast 30 basis points to about 5%, partly offset by higher profitability assumptions following a strong third-quarter result. While uncertainty remains elevated amid global macro and geopolitical headwinds and volatile demand from China, we assume Verisign will enjoy modest domain name base growth in 2024, and a more robust recovery from 2025 as economic conditions improve.