Unified Cybersecurity Platform Adoption Will Drive Strong Long Term Upside Potential

Catalysts

About Trend Micro

Trend Micro is a global cybersecurity company providing AI powered protection across endpoints, cloud, networks, and digital life.

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

• Accelerating adoption of the Vision One unified cybersecurity platform, including high growth in Vision One ARR, rising module consumption per customer and a 46% attach rate within large enterprise, is expanding wallet share and should drive sustained double digit revenue growth and structurally higher net revenue retention and earnings.
• Growing demand for advanced, AI infused security capabilities such as digital twin simulations of IT environments, Agentic SIEM and cyber risk exposure management positions Trend Micro as a consolidation winner, supporting premium pricing, upsell into an internal addressable market of USD 7.3 billion and ongoing expansion of operating margins.
• Increasing complexity of cloud and hybrid infrastructures, combined with Trend Micro’s recognized leadership across endpoint, cloud security, XDR and vulnerability research, is deepening strategic relationships with large enterprises and MSPs, which should translate into higher recurring revenue, improved gross margins and durable earnings compounding.
• Rising cybercrime, including scams, deep fakes and identity fraud, is enlarging the consumer and beyond device protection market where Trend Micro is already posting near 40% growth in new services, which is likely to re accelerate overall consumer revenue and support margin leverage as the Digital River disruption fades from reported results.
• Global regulatory and supply chain pressures around cyber risk, plus Japan’s rapid shift toward multiyear comprehensive contracts and platform based security, are driving 50% plus growth in Trend Vision One revenue and 100% plus growth in several usage metrics, underpinning longer visibility on cash flows, higher ASPs and improving net margins and operating income.

Assumptions

This narrative explores a more optimistic perspective on Trend Micro 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 Trend Micro's revenue will grow by 6.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.8% today to 17.5% in 3 years time.
• The bullish analysts expect earnings to reach ¥57.8 billion (and earnings per share of ¥442.29) by about December 2028, up from ¥34.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥45.4 billion.
• 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 27.9x on those 2028 earnings, up from 25.4x today. This future PE is greater than the current PE for the JP Software industry at 19.1x.
• The bullish 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 6.48%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Slowing enterprise ARR growth and flat overall ARR, despite strong Vision One adoption and a 46% attach rate, indicate that aggressive discounts and multiyear deals used to drive migration may be pulling revenue forward and depressing recurring revenue growth over time. This could ultimately weigh on revenue and earnings.
• Structural headwinds in Western markets, including prolonged government procurement delays, tariffs and weaker midsized enterprise demand in the Americas and Europe, may reflect a longer term softness in key verticals. This could cap top line expansion and pressure operating margins and earnings.
• The consumer segment remains fragile, with a 9% year over year revenue decline, lingering effects from the Digital River bankruptcy and low conversion from rapidly growing free downloads to paid subscriptions. This suggests that the recovery of this business and its contribution to overall revenue and net margins could be slower and less profitable than assumed.
• In Japan and other mature markets, demographic decline, heavy reliance on partners and carriers that are pushing their own security products and customer hesitancy to adopt unified platforms over best of breed stacks may limit Vision One penetration and beyond device protection monetization. This could constrain long term revenue growth and margin expansion.

Valuation

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

• The assumed bullish price target for Trend Micro is ¥10000.0, which represents up to two standard deviations above the consensus price target of ¥8416.67. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥10000.0, and the most bearish reporting a price target of just ¥6200.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ¥329.6 billion, earnings will come to ¥57.8 billion, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of ¥6721.0, the analyst price target of ¥10000.0 is 32.8% higher.
  
• 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.