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

How have these above catalysts been quantified?

• 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 7.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.7% today to 10.4% in 3 years time.
• The bearish analysts expect earnings to reach SEK 265.6 million (and earnings per share of SEK 3.08) by about June 2029, up from SEK 98.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK519.8 million.
• 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 16.5x on those 2029 earnings, down from 50.7x today. This future PE is lower than the current PE for the SE Software industry at 24.3x.
• The bearish analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

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

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

• The assumed bearish price target for Yubico is SEK43.0, which represents up to two standard deviations below the consensus price target of SEK58.25. 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 SEK70.0, and the most bearish reporting a price target of just SEK43.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be SEK2.5 billion, earnings will come to SEK265.6 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of SEK58.05, the analyst price target of SEK43.0 is 35.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.