Digital Transformation And Cybersecurity Threats Will Drive Hardware Adoption

Key Takeaways

• Rapid enterprise adoption, regulatory drivers, and new tech use cases position Yubico for outsized, sustained revenue growth and market share gains.
  
• Transition to subscription models and leadership in hardware-based authentication ensure recurring revenues, margin expansion, and strong pricing power.
  
• Increasing competition from integrated and software-based authentication solutions, alongside rising costs and industry commoditization, threatens Yubico's growth, margins, and long-term relevance.

Catalysts

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

• Analyst consensus acknowledges the potential for increased penetration within existing Fortune 500 and Global 2000 clients, but this likely understates the snowball effect from new mandates and rapid digital transformation; Yubico's unique zero-account-takeover record and high repurchase rates position it for faster-than-expected, enterprise-wide roll-outs that could sharply accelerate revenue growth and lift margins as deployment scales.
  
• While analysts broadly see international channel expansion as a revenue growth lever, they may not fully price in the explosive demand coming from regulatory drivers and cybersecurity threats in both the Asia-Pacific and new verticals, with Yubico poised to disproportionately benefit due to its leadership in hardware-backed authentication-possibly outpacing market growth rates and leading to significant market share gains.
  
• The accelerated shift from perpetual to subscription-based YubiKey-as-a-Service is creating an annuity-like revenue stream with growing ARR already up 37 percent year over year, meaning short-term headwinds in net sales will quickly give way to higher long-term revenue visibility, improved customer lifetime value, and ultimately, materially higher net margins.
  
• Yubico stands to be the default standard as the risk of cyberattacks from compromised credentials and stricter regulatory requirements force widespread, hardware-centric authentication upgrades across industries, ensuring long-term demand tailwinds and defensive pricing power that can sustain above-industry top-line growth and gross margins.
  
• The proliferation of AI companies and Internet of Things use cases is expanding Yubico's total addressable market far beyond current expectations, as high-security requirements for both emerging technologies and traditional enterprises drive incremental, high-value deployments, supporting long-duration revenue and margin expansion.

Yubico Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Yubico compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Yubico's revenue will grow by 17.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.9% today to 18.6% in 3 years time.
• The bullish analysts expect earnings to reach SEK 707.3 million (and earnings per share of SEK 8.18) by about August 2028, up from SEK 254.5 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 28.1x on those 2028 earnings, down from 45.5x today. This future PE is lower than the current PE for the SE Software industry at 34.6x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Yubico Future Earnings Per Share Growth

Risks

• Intensifying competition from built-in passwordless authentication solutions such as Apple Passkeys and Microsoft Hello may erode market demand for standalone hardware like YubiKey, placing long-term downward pressure on revenue growth and market share.
  
• Yubico's business remains focused on a relatively narrow product portfolio centered on hardware keys, which exposes the company to product obsolescence risk as customers increasingly migrate to software-based or integrated authentication solutions, potentially resulting in declining revenues over time.
  
• The accelerating adoption of bundled SaaS-based identity and security platforms with built-in multi-factor authentication can disintermediate Yubico's hardware offering, shrinking the company's addressable market, slowing top-line growth and creating risk for future earnings.
  
• Rising commoditization and open standards in the authentication industry are heightening price competition and making it more difficult for Yubico to differentiate its products, threatening both net margin and long-term profitability.
  
• High manufacturing and distribution costs, as well as new U.S. import tariffs, may weigh on Yubico's cost structure; if sales volumes or perpetual product growth do not offset these pressures, margins could contract and profitability could suffer in the long term.

Valuation

• The assumed bullish price target for Yubico is SEK190.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Yubico'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 SEK190.0, and the most bearish reporting a price target of just SEK130.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be SEK3.8 billion, earnings will come to SEK707.3 million, and it would be trading on a PE ratio of 28.1x, assuming you use a discount rate of 6.4%.
• Given the current share price of SEK133.95, the bullish analyst price target of SEK190.0 is 29.5% 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.