Despite Upgrade, VeriSign Problems May Only Be Starting (VRSN, WWWW, ENTU)

VeriSign inc. (NASDAQ: VRSN) has had more than a tough week.  Shares are seeing a winning day so far as it was upgraded this morning over at R.W.Baird to an Outperform rating.  While we did expect someone to upgrade the stock based upon price/valuation, we are genuinely concerned here that VeriSign’s problems may still have more life in the legs. 

Just two weeks ago, we issued a SPECIAL SITUATION alert to our newsletter subscribers with a short sell or put option strategy based upon many current and recent concerns we have.  We sent out an alert on Monday night asking for holders to cover HALF of the position.  This gain on Tuesday morning would have been approximately 20% on the stock, but the options trade (DEC08 $32.50 PUTS) would have generated more than a 100% gain.  You can see the actual report sample document here now that this is off of embargo.

Right before the long weekend, the company announced that its CEO was vacating the top spot. While that was the catalyst that prompted our profitable call to bet against it, that is likely the second shoe to drop among many.  Yes, the second.  The first shoe to drop was the April resignation of its CFO and of its Controller simultaneously.  Sorry, but that is more than a flag and cannot just be a coincidence.

So what else is there to not believing the current value of this stock?  Competitors such as Website Pros (NASDAQ: WWWW) (or Web.com), Entrust (NASDAQ: ENTU), Register.com, GoDaddy, 1and1, and others offer far cheaper services, and while we argue that VeriSign is the Rolls Royce of the web we believe that the small business migration growth from the waves of "accidental entrepreneurs" will have to seek lower priced services at shops that offer turnkey solutions.  There is some political risk here after 2009 depending on the US Presidential election, and there are many new domain extensions coming online. 

We also believe that its divesting strategy is taking far too long and is going to generate far less than was initially spent on some of these businesses.  Another isue is teh share buyback, which we believe Wall Street gave the benefit of the doubt over on the entire amount and then some all up front without considering the risks.  The company’s recent expansions may also not pan out for VeriSign as quickly as it hopes.

Lastly, we believe that this last departure puts the bias for a real miss to earnings as a very likely scenario.  That is pure speculation though, as the company didn’t change its May guidance recently on the CEO departure.  We also believe that its operating costs are going to grow, and we also believe that it will have a hard time passing down additional price hikes for domain registration.

There are many risks to staying negative after such a sharp and fast drop.  Butthat is why we believe that only a half position should be maintained in a bet against the company. We have continued to favor Website Pros, Inc. (NASDAQ: WWWW) for our "10 Stocks Under $10" newsletter and just issued a new alert on that one this last weekend.

Risks in staying negative in VeriSign here revolve around the company suddenly selling units that have been on the block, accelerated share repurchases, accelerated and above expectations new orders and expanded orders from key customers, domain growth, and more.

Jon C. Ogg
July 9, 2008