Verisign stock (NASDAQ: VRSN) is seen as a better pick than F5 Networks stock (NASDAQ: FFIV) due to its superior profitability and financial position. Investors have assigned a higher valuation multiple to Verisign, at 11.6x revenues compared to 3.7x revenues for F5. While both stocks have underperformed the broader market, with VRSN seeing a decline of 20% and FFIV showing little change, VRSN is expected to offer better returns in the next three years.
F5 has seen slightly better revenue growth with a 6.2% average annual growth rate in the last three years compared to 5.7% for Verisign. F5’s revenue rose from $2.4 billion in fiscal 2020 to $2.8 billion in 2023, driven by demand in new markets. Verisign’s revenue increased from $1.26 billion to $1.49 billion in the same period due to higher demand for domain names. Looking ahead, F5 is expected to see better sales growth with a CAGR of 3% to reach $3 billion in three years, while Verisign is projected to see sales rise at a 2% annual growth rate to a little over $1.6 billion.
In terms of profitability, F5 has a higher operating margin of 19.1% in 2023 compared to Verisign’s 67.0%. F5’s margin has been impacted by rising component costs, while Verisign’s margin of 67.3% in the last twelve months is much stronger. Both companies have comparable financial risk, with F5 having lower debt as a percentage of equity at 2.6% compared to Verisign’s 10%, but Verisign having a higher cash cushion at 57% compared to F5’s 26%.
When looking at valuation multiples, Verisign is trading at 11.8x revenues compared to its historical average of 16.2x, while F5 is trading at 3.7x revenues compared to its average of 4.1x. Trefis Machine Learning analysis suggests an expected return of 18% for VRSN over the next three years, compared to an 8% expected return for FFIV. Overall, VRSN is predicted to outperform FFIV in the next three years based on various factors including revenue growth, profitability, and valuation multiples.
During the current uncertain macroeconomic environment with high oil prices and elevated interest rates, both FFIV and VRSN may see higher levels, but VRSN is likely to outperform FFIV. While beating the S&P 500 consistently has been challenging for individual stocks in recent years, the Trefis High Quality Portfolio has outperformed the index each year, showing better returns with less risk. Investing with Trefis Market Beating Portfolios can provide valuable insights into comparisons across industries, helping investors make informed decisions.
