Global Expansion And Partnerships With Okta And Microsoft Will Strengthen Future Market Position

Key Takeaways

• Opportunities in existing and new markets could boost revenue through expansion and strategic partnerships, enhancing market share and positioning.
  
• Strong financial health and high gross margins support strategic investments and potential earnings growth.
  
• Management turnover, delayed revenue recognition, and rising inventory levels may strain liquidity and working capital, impacting investor confidence and profitability.

Catalysts

Provides authentication solutions for use in computers, networks, and online services.

• Significant opportunity for penetration growth among existing Fortune 500 and Global 2000 customers, who have only deployed Yubico's products to a subset of employees so far, suggesting substantial potential to increase revenue.
  
• Expansion efforts in new markets such as Asia Pacific and development of global channel models could lead to increased market share and thus higher revenue growth.
  
• Transitioning from login protection to full identity protection with partnerships like Okta and Microsoft, potentially opening new revenue streams and enhancing strategic positioning.
  
• High gross margins consistently above 80% due to focus on hardware-backed multi-factor authentication, supporting ongoing strong net margins.
  
• Strong financial position with low debt levels and high cash reserves sets the company up for strategic investments and market expansion, influencing future earnings growth positively.

Yubico Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yubico's revenue will grow by 22.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.0% today to 19.0% in 3 years time.
• Analysts expect earnings to reach SEK 814.7 million (and earnings per share of SEK 9.07) by about April 2028, up from SEK 371.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, down from 44.1x today. This future PE is greater than the current PE for the SE Software industry at 31.7x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

Yubico Future Earnings Per Share Growth

Risks

• Heavy reliance on large orders and significant Q4 deliveries not being realized until Q1 2025 could impact short-term revenue recognition and cash flow, which might affect investor confidence in growth consistency.
  
• The transition from a perpetual model to a subscription-based model causes a delay in revenue recognition, potentially impacting short-term financials and complicating financial forecasting.
  
• Inventory levels have risen significantly and account receivables have doubled, which could strain working capital and cash flow if not managed carefully, affecting net margins and liquidity.
  
• Currency fluctuations and unrealized positive currency effects might mask underlying operational issues. Reliance on favorable currency movements could lead to unpredictable impacts on profitability.
  
• Management turnover, such as the CFO's impending retirement, poses potential execution risks, as effective transition and maintaining leadership stability is crucial for strategic goals and operational efficiency, impacting earnings potential.

Valuation

• The analysts have a consensus price target of SEK271.25 for Yubico based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK4.3 billion, earnings will come to SEK814.7 million, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of SEK190.0, the analyst price target of SEK271.25 is 30.0% 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.