OS Level Integration Will Undercut Demand For Hardware Security

Key Takeaways

• Increasing adoption of device-based authentication and OS-level security threatens Yubico's hardware key market, potentially reducing revenue growth and compressing margins.
  
• Shifting to subscriptions introduces revenue volatility and dependency on renewals, while market concentration and weak diversification heighten risks from competition and tech shifts.
  
• Accelerating subscription growth, expansion opportunities within major enterprises, strong market tailwinds, and high margins position Yubico for robust, sustainable long-term revenue and profit growth.

Catalysts

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

• The rapidly growing adoption of biometric authentication and native device-based security features is likely to erode the long-term need for external hardware security keys, which could significantly contract Yubico's addressable market and dampen future revenue growth.
  
• Embedded authentication methods in mobile devices and laptops are accelerating, with OS-level integration making standalone hardware increasingly redundant, threatening Yubico's ability to sustain sales growth and compressing gross margins over time.
  
• Yubico's revenue mix is shifting heavily towards subscriptions, but this transition slows near-term net sales recognition while locking the company into a model highly sensitive to customer renewal risk and competitive pricing, creating potential volatility for both revenue and future earnings.
  
• Prolonged global macroeconomic uncertainty and corporate budget tightening could deprioritize spending on hardware-based security, which would result in continued delays or scaling back of large deployments, pressuring top line growth and net margins.
  
• Dependence on a narrow portfolio focused on hardware authentication leaves Yubico exposed to technological obsolescence and aggressive competition, risking a downward spiral in sales, thinner net margins, and stagnating earnings unless significant diversification is achieved.

Yubico Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Yubico compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Yubico's revenue will grow by 16.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.9% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach SEK 500.1 million (and earnings per share of SEK 5.77) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, down from 45.5x today. This future PE is lower than the current PE for the SE Software industry at 34.7x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Yubico Future Earnings Per Share Growth

Risks

• The accelerating shift to YubiKey-as-a-Service subscriptions, with 41% annualized bookings growth in Q2 and a growing pipeline dominated by large subscription deals, increases the proportion of recurring revenues, which tends to stabilize and eventually boost long-term revenue and earnings as ARR converts into recognized sales.
  
• The company's land-and-expand sales model has led Yubico to already be present in 25-30 percent of the Global 2000, but most customers use the product for only a subset of users-creating significant embedded opportunity for expansion and future revenue growth as organizations roll YubiKey out more broadly.
  
• Secular trends such as increasing cybercrime, data breaches, and regulations requiring strong authentication are increasing the global addressable market for hardware MFA and are already driving both new customer wins and demand from security-conscious sectors like financial services, public sector, AI, and European defense, supporting a robust long-term revenue outlook.
  
• The company's gross margins consistently around 80 percent, even as a hardware player, provide a buffer for profitability and suggest ongoing pricing power and cost discipline, which underpins strong net margins and supports continued investment in R&D and market expansion.
  
• Strategic focus on expansion from protecting logins to protecting users via ID verification and potential acquisitions, coupled with channel partnerships and increasing software/service attach, sets the stage for product innovation and diversification, which can fuel sustainable revenue and EBIT margin improvement over time.

Valuation

• The assumed bearish price target for Yubico is SEK130.0, which represents the lowest 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK240.0, and the most bearish reporting a price target of just SEK130.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK3.7 billion, earnings will come to SEK500.1 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of SEK134.1, the bearish analyst price target of SEK130.0 is 3.2% lower. The relatively low difference between the current share price and the analyst bearish 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.