Expanding YubiKey Adoption And Global Reach Will Drive Future Growth

Key Takeaways

• Expanding YubiKey deployment in large accounts and shifting to subscription models could significantly increase revenue predictability and growth.
  
• Geographic market expansion and strategic M&A in complementary segments could drive diversified income and accelerated growth.
  
• Concerns about security vulnerabilities and execution risks in customer expansion could impact growth, while financial volatility and increased costs pressure margins and earnings stability.

Catalysts

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

• Yubico's strategy to increase penetration within existing large accounts by expanding the deployment of their YubiKeys presents significant opportunities for revenue growth. As they expand usage from initial subsets like PAM users to broader employee bases, this could result in increased sales volumes.
  
• The increasing adoption of YubiKeys by banks, like the partnership with PKO Bank in Poland, suggests a potential new revenue stream by targeting end consumers through partnerships. If successful, this could substantially increase revenue in the long term.
  
• The company's efforts to shift more customers to subscription-based models from perpetual licenses can lead to more predictable revenue streams and potentially higher earnings due to recurring revenue.
  
• Geographic expansion, particularly in less penetrated markets such as EMEA and Asia Pacific, offers significant growth potential, which can drive increased revenues and diversify the income stream beyond the current strongholds.
  
• Strategic use of a strong balance sheet for potential M&A activity in complementary market segments could accelerate growth and increase revenue opportunities, especially as Yubico considers expanding its footprint and offerings.

Yubico Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yubico's revenue will grow by 24.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.2% today to 19.9% in 3 years time.
• Analysts expect earnings to reach SEK 879.5 million (and earnings per share of SEK 10.01) by about January 2028, up from SEK 345.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.5x on those 2028 earnings, down from 61.2x today. This future PE is lower than the current PE for the SE Software industry at 43.1x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.54%, as per the Simply Wall St company report.

Yubico Future Earnings Per Share Growth

Risks

• The discovery of a security vulnerability in previous versions of YubiKey, despite being deemed moderate, raises concerns about the company's ability to maintain high security and transparency, potentially affecting customer trust and leading to reduced revenue and higher costs for remediation.
  
• Yubico's strong reliance on larger customer accounts, with a relatively low penetration of existing customers, implies execution risk in expanding within these accounts, which could impact revenue growth if not effectively addressed.
  
• A potential slowdown in the growth of subscription sales compared to perpetual sales indicates a challenge in convincing customers of the value of the subscription model, which could affect future recurring revenue streams and earnings stability.
  
• Increased focus on R&D and sales to sustain business growth presents ongoing operational costs that might pressure net margins in the short term, especially if growth in revenue fails to outpace these investments.
  
• Currency fluctuations and sizable accounts receivables have affected working capital and cash flow positions, adding financial volatility that could impact overall earnings predictability and financial stability.

Valuation

• The analysts have a consensus price target of SEK322.5 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 SEK4.4 billion, earnings will come to SEK879.5 million, and it would be trading on a PE ratio of 37.5x, assuming you use a discount rate of 5.5%.
• Given the current share price of SEK245.5, the analyst's price target of SEK322.5 is 23.9% 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.