Does Warren Buffett Know Something Wall Street Doesn't? He Recently Added Shares of an Internet Monopoly That 60% of Analysts Say Not to Buy.

If you're looking for an investor to emulate, you could do a lot worse than Warren Buffett. The Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO has produced incredible returns for anyone who's stuck by his side throughout his career.

He produced eye-popping 23.8% compound annual returns for investors in Buffett Partnership Ltd between 1957 and 1969, but that wasn't some one-off fluke. He took over the failing textile business that was Berkshire Hathaway midway through 1965 and turned it into a massive holding company. Over the last 60 years, he's produced a compound annual return of more than 20% for shareholders.

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Buffett's never been shy about going against what Wall Street is doing. Some of his best investments came from buying stocks the rest of the market was selling, so it's worth noting that one of his most recent investments isn't very popular on Wall Street.

Indeed, 60% of the analysts covering this stock rate it the equivalent of sell or hold, even though it's a dominant internet company with a legal monopoly ensuring steady and growing returns for shareholders.

Image source: The Motley Fool.

The longtime holding Buffett's adding to Berkshire's portfolio

One of the most famous Warren Buffett quotes is, "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." Many of the biggest positions in Berkshire Hathaway's portfolio are longtime holdings dating back decades.

Buffett first bought shares of his recent addition all the way back in 2012, so it's a pretty good assumption he likes the business and the management. It's no surprise, then, that he decided to add to his VeriSign (NASDAQ: VRSN) position in December and January. After the $94 million purchase, Berkshire Hathaway now owns a 14% stake in the company.

Berkshire's purchases were at prices between $191 and $206 a share. That's well below the price targets among the five analysts covering the stock, which range from $260 to $275. Nonetheless, three of those five analysts rate the stock a hold or underweight. While the sample size is small, it's a bit surprising that Wall Street is so negative on the stock.

It's a legal monopoly with incredible profit margins

Verisign holds the exclusive rights to register websites with .com and .net top-level domains. These gold-standard domains allow it to consistently raise prices year after year. Its contract with the Internet Corporation for Assigned Names and Numbers (ICANN) puts a cap on those annual raises at 7% and 10% for .com and .net domains, respectively.

In return, VeriSign operates critical infrastructure ensuring uninterrupted domain-name system services. Its costs are relatively low, and its margins expand every year as it raises prices. Last year, VeriSign produced a gross margin of 87.7% and an operating margin of 67.9%.

Perhaps the biggest knock against VeriSign is that it's seen a decline in its domain base. The company ended 2024 with 169 million registered domains, down from 174.8 million at the end of the first quarter of 2023. That said, it's seeing strong new name registration rates in recent quarters and is facing fewer expiring domains in 2025.

Management is optimistic about new domain registration in 2025. In its fourth-quarter earnings call, management discussed cyclical trends working in its favor as more registrars are focused on customer acquisition.

Additionally, negative headwinds from Chinese-registered domains (which have higher churn rates) are diminishing as the country now accounts for just 5% of its business. VeriSign is also making a bigger marketing push in partnership with registrars and is seeing positive results so far.

Should investors follow Buffett or listen to Wall Street?

VeriSign's share prices have soared since Buffett bought them in December and January. The stock trades for about $255 per share, as of this writing, making it one of the best-performing stocks in Berkshire's portfolio.

At the current price, shares trade at a forward price-to-earnings ratio (P/E) of about 29.6, based on management's outlook for 2025. That valuation makes VeriSign a bit of a risky stock despite the rock-solid business. It needs to execute on its efforts to reinvigorate growth in its domain base in order to earn that valuation.

In a market plagued by uncertainty and full of stocks trading at high valuations, VeriSign offers slow and steady growth and predictable free-cash-flow generation for its shareholders. That may be worth paying up for in the current environment. While Buffett bought shares at a much more attractive valuation, the increased confidence from management should give investors more willingness to back the stock, even at the current level.

VeriSign stock might not appeal to everyone, but it's surprising that 60% of Wall Street analysts covering the stock say you shouldn't buy it. It's really hard to bet against Buffett.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and VeriSign. The Motley Fool has a disclosure policy.