European Digital Sovereignty Tailwinds Will Support This Cybersecurity Provider’s Long-Term Upside Potential

Catalysts

About WithSecure Oyj

WithSecure Oyj provides cybersecurity software and services focused on cloud based protection, threat detection and managed security for businesses.

What are the underlying business or industry changes driving this perspective?

• Growing interest in digital sovereignty in Europe, including requests where only European vendors are eligible, is supporting partner wins such as DNA in Finland and several managed service providers in the Netherlands. This can support recurring software revenue through broader deployments and higher deal sizes.
• The shift in European public sector and corporate buyers toward European cybersecurity suppliers, helped by concerns around non European technology in critical systems, positions WithSecure as one of a small group of regional contenders. This can support Elements Cloud and Co security ARR and long term customer stickiness.
• Expansion of Elements Cloud and Co security offerings, including exposure management, extended detection and response for Azure and the Elements Infinite bundle, gives partners a wider toolkit to sell to mid market customers. This can support higher revenue per customer and a richer mix for net margins.
• Breakthrough zero day vulnerability detection that uses telemetry, behavioral data and AI moves more work from high cost consulting into scalable software. This can support growth in subscription revenue while helping maintain or improve earnings through a more efficient cost base.
• A partner first model focused on mid market managed service providers, including examples like Reliance standardizing on WithSecure across acquired providers, allows technology to be switched on across entire fleets at once. This can support faster ARR growth and operating leverage in earnings as sales and marketing expenses scale more slowly than billings.

Assumptions

This narrative explores a more optimistic perspective on WithSecure Oyj compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming WithSecure Oyj's revenue will grow by 6.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -8.3% today to 4.8% in 3 years time.
• The bullish analysts expect earnings to reach €6.8 million (and earnings per share of €0.04) by about January 2029, up from €-9.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 54.2x on those 2029 earnings, up from -30.6x today. This future PE is greater than the current PE for the GB Software industry at 25.8x.
• The bullish analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Revenue is still concentrated in a small number of large Managed Services clients, and the recent churn of a very large U.K. enterprise has already contributed to a 22% decline in Managed Services and Cloud ARR growth of 3%, so further insourcing or tool changes by remaining big customers could pressure recurring revenue and earnings.
• The shift from large enterprise Managed Services toward a partner led mid market model depends on new partners ramping quickly. Management has acknowledged that much of the groundwork is not yet visible in the numbers and expects a back end loaded year, so slower than expected partner activation or delayed deals could limit ARR growth and keep EBITDA margins under pressure.
• Cloud Protection for Salesforce currently reports strong ARR growth but management is deliberately reinvesting all contribution back into expansion and accepts only breakeven profitability. If growth in this product slows because of foreign exchange headwinds such as the €400,000 ARR drag in Q2, or due to changes in Salesforce priorities, the company could face weaker revenue growth alongside limited improvement in net margins.
• The company is executing multiple structural changes at once, including divesting consulting and the Malaysian entity, reorganising global sales into a new model and targeting €6.5m in annual net cost savings. Any execution issues, higher one off restructuring charges or disruption to sales efforts could offset efficiency gains and weigh on earnings.
• Long term dependence on mid market partners, European public sector demand and the digital sovereignty theme concentrates the growth story in a specific region and customer segment. If tenders stay with non European vendors or public sector buying cycles lengthen, the company may not reach its ARR guidance range of 10% to 20% for Elements or 20% to 35% for Cloud Protection for Salesforce, which could constrain revenue growth and EBITDA margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for WithSecure Oyj is €1.7, which represents up to two standard deviations above the consensus price target of €1.35. This valuation is based on what can be assumed as the expectations of WithSecure Oyj's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €1.7, and the most bearish reporting a price target of just €1.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €141.0 million, earnings will come to €6.8 million, and it would be trading on a PE ratio of 54.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of €1.71, the analyst price target of €1.7 is 0.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.