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As the calendar winds down, trading activity on Wall Street typically slows as investors prepare for the holiday season. December 2024, however, deviated from tradition, witnessing significant sell-offs instead of the expected Santa Claus rally.
On the other hand, Warren Buffett and his investment team at Berkshire Hathaway were actively navigating the tumultuous market. Although the year had been relatively quiet for Buffett in terms of new acquisitions, late December saw Berkshire making headlines by investing in a long-established internet stock that has gained over 3,000% since its 1998 debut.
Focused on Fundamentals
Amidst a market frenzy characterized by high valuations for artificial intelligence stocks, Buffett’s approach has remained grounded. Berkshire Hathaway has adhered to its time-honored strategy of seeking value rather than chasing high-flying stocks. The conglomerate’s investments were minimal, share repurchases were down, and its cash reserves swelled to more than $300 billion, signaling a cautious stance on perceived market overvaluation.
Despite the market challenges, Berkshire managed to finish the year with modestly better returns than the S&P 500, demonstrating a resilient performance.
In the latter weeks of December, as market declines continued, Berkshire began to make strategic moves. The firm reported several incremental increases in its stake in Verisign (VRSN 0.25%), a leading internet domain services provider. According to filings with the Securities and Exchange Commission (SEC), from December 17 to December 30, Berkshire acquired over 454,000 shares of Verisign at an average price of $198.88, amounting to an investment exceeding $90 million. Currently, Berkshire holds a 13.8% interest in Verisign, a position valued at approximately $2.7 billion, which still represents less than 1% of its sprawling $300 billion equity portfolio.
Verisign, which went public in early 1998, has seen its stock appreciate significantly, with a staggering increase of around 3,150%. Yet, it remains relatively overlooked on Wall Street, covered by only two equity analysts. The company has been instrumental in shaping the internet infrastructure, offering essential domain name registration services for popular domains like dot-com and dot-net. Verisign also operates two of the 13 critical global root zone servers, integral to the internet’s domain name system.
Upon closer inspection, Verisign exhibits several characteristics that attract Buffett’s investment strategy. The company performs essential roles that sustain internet operations and boasts dominance in the domain registration space, with nearly 170 million dot-com and dot-net domains under its management. This substantial market presence grants Verisign a protective competitive advantage. Furthermore, the firm’s profit margin—which exceeded 55% last year—indicates robust pricing power in its operations.
Reasons Behind Buffett’s Investment Now
Despite its impressive long-term stock performance, Verisign’s stock price rose only about 3% in 2024, lagging behind the broader market trends. One factor raising eyebrows is the observed decline in both active and registered domain names, which fell by approximately 2.5% year-over-year in the third quarter. Additionally, recent quarters have shown a lower-than-expected domain renewal rate, stirring concerns about Verisign’s growth trajectory.
Earlier in the year, uncertainty loomed regarding whether the National Telecommunications and Information Administration would extend the contract permitting Verisign to manage the dot-com registry. Although this contract was renewed, ongoing scrutiny about the company’s pricing practices lingered among lawmakers.
Nonetheless, the regulatory climate may shift under the incoming administration of President-elect Donald Trump, which is anticipated to adopt a less severe approach to anti-monopoly enforcement compared to the Biden administration. As apprehensions surrounding regulatory oversight diminish and Verisign continues to underperform against its historical price-to-earnings ratios, Buffett and his team are seizing the opportunity to invest.
Source
www.fool.com