AI Cybersecurity Adoption Will Drive Stable Long-Term Prospects Despite Near-Term Margin Pressure

Catalysts

About Trend Micro

Trend Micro provides cybersecurity platforms and services for enterprises and consumers worldwide.

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

• Although the migration of large enterprises to the Vision One platform is progressing with a 46% attach rate and strong module expansion, the deliberate use of aggressive discounts and multiyear deals to accelerate upgrades risks capping near term ARR growth and compressing net margins as more revenue is deferred.
• Although AI infused capabilities such as cyber risk exposure management, digital twin security environments and Agentic SIEM expand Trend Micro's role in protecting increasingly complex attack surfaces, execution risk around customer training, upgrade bandwidth and platform adoption could slow monetization and temper the expected uplift in recurring revenue and earnings.
• Although global demand for cybersecurity remains structurally supported by rising zero day vulnerabilities, automation needs and regulatory pressure, elongated procurement cycles in Western government and midmarket customers and potential future budget constraints could keep Enterprise ARR growth modest and limit upside to revenue and operating income.
• Although the shift from consumer device centric protection toward broader digital life and anti fraud offerings is growing quickly and aligned with rising online scam and deep fake risks, low conversion from free to paid users and competitive pressure from carrier branded security products may restrain consumer revenue recovery and weigh on overall earnings growth.
• Although cloud delivered SaaS security and growing consumption based models like Vision credits support higher lifetime value per customer, rising cloud infrastructure costs and the need to invest in platform scalability and AI capabilities may offset efficiency gains from flat headcount, constraining improvements in gross margin and net income over time.

Assumptions

This narrative explores a more pessimistic perspective on Trend Micro compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Trend Micro's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.8% today to 16.2% in 3 years time.
• The bearish analysts expect earnings to reach ¥51.6 billion (and earnings per share of ¥406.5) by about January 2029, up from ¥34.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.4x on those 2029 earnings, down from 24.3x today. This future PE is lower than the current PE for the JP Software industry at 20.3x.
• The bearish analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The accelerating adoption of the Vision One unified cybersecurity platform and AI driven modules such as cyber risk exposure management, combined with a 46% attach rate and higher net revenue retention of 136%, could support structurally faster growth in enterprise ARR and operating income rather than a flat share price outcome. This may occur by driving higher average spend per customer and improved profitability in the long run, impacting revenue and earnings growth.
• AI enabled productivity gains and largely flat headcount, alongside tight control of operating expenses and a sustained operating margin around 23%, suggest that Trend Micro can expand margins structurally as it scales Vision One and SaaS offerings. This could lead to a rerating of the valuation and a rising share price supported by higher net margins and operating income.
• Secular tailwinds in cybersecurity, including rising zero day vulnerabilities where Trend Micro already leads vulnerability disclosures at 73% and expanding exposure to high growth segments like SIEM and cloud security, increase the company’s addressable market to USD 7.3 billion inside existing accounts. These factors could drive multi year revenue acceleration and stronger earnings, contradicting expectations of a stagnant share price.
• The recovery and strategic repositioning of the consumer business toward digital life and anti fraud protection, evidenced by 38% year over year growth in beyond device offerings, growing global partnerships and potential PC refresh demand from Windows 10 end of life, could restore consumer revenue growth and diversify cash flows. This may support higher consolidated revenue and stabilize or improve net margins.
• Growing multiyear comprehensive enterprise contracts, Vision credit consumption models and increasing module penetration per Vision One customer, together with improving pre GAAP performance and strong cash flow, create higher visibility and quality of recurring revenue. This may attract long term investors and push the valuation and share price higher as revenue and earnings become more predictable and efficient.

Valuation

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

• The assumed bearish price target for Trend Micro is ¥6200.0, which represents up to two standard deviations below the consensus price target of ¥7950.0. This valuation is based on what can be assumed as the expectations of Trend Micro's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥9900.0, and the most bearish reporting a price target of just ¥6200.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be ¥319.0 billion, earnings will come to ¥51.6 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of ¥6502.0, the analyst price target of ¥6200.0 is 4.9% 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.