Secular Digital Trends Will Transform Identity Verification While Facing Hurdles

Key Takeaways

• Rapid growth in security subscriptions and FIDO2 integration positions OneSpan for stronger recurring revenues, greater operating leverage, and outsized earnings growth.
  
• Unique banking customer base and advanced authentication offerings create significant cross-sell potential, supporting sustained topline and margin expansion.
  
• Slow cloud transition, reliance on financial clients, increased competition, and rising costs challenge OneSpan's growth, pricing power, and long-term margin sustainability.

Catalysts

Designs, develops, and markets digital solutions for security, authentication, identity, electronic signature, and digital workflow products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific regions.

• Analyst consensus views the software transition as a margin driver, but OneSpan's robust acceleration in high-growth security subscriptions-up 39% year-on-year-and rapid integration of Nok Nok's FIDO2 platform can catalyze significantly higher recurring revenues and drive operating leverage well beyond current expectations, potentially propelling both net margins and multi-year earnings growth.
  
• Analysts broadly expect cost savings and restructuring benefits to steadily improve EBITDA, yet recent record first-half results (33% adjusted EBITDA margin) and an active, cash-rich balance sheet signal the potential for an accelerated path toward "Rule of 40" performance, creating room for both sustained profitability improvement and enhanced shareholder returns through future buybacks, dividends, or M&A.
  
• Surging global regulatory pressure and rising cybersecurity threats are set to permanently elevate spending on advanced identity authentication solutions; OneSpan's expanded platform and first-mover advantage in FIDO2 and mobile authentication position the company to capture substantially greater market share as enterprises modernize security infrastructure, unlocking long-term double-digit revenue growth potential.
  
• The company's unmatched global banking customer base of over 1,000 institutions creates a powerful cross-sell opportunity for integrated, future-ready authentication products like the Nok Nok portfolio-if even a modest portion of this base migrates to premium term-based FIDO2 solutions, annual recurring revenue could inflect sharply upward, providing years of highly visible topline expansion.
  
• Investments in next-generation R&D and a dedicated North American security sales force are already showing early traction, and with "land and expand" momentum in both mature and underpenetrated regions, OneSpan is positioned to capitalize on rapid fintech ecosystem growth and embedding its software at the core of remote transaction security-boosting recurring revenues and supporting expansion of net margins well into the next decade.

OneSpan Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on OneSpan compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming OneSpan's revenue will grow by 4.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 24.9% today to 14.2% in 3 years time.
• The bullish analysts expect earnings to reach $38.5 million (and earnings per share of $0.96) by about August 2028, down from $59.9 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 29.7x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the US Software industry at 37.6x.
• Analysts expect the number of shares outstanding to grow by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

OneSpan Future Earnings Per Share Growth

Risks

• The ongoing transition by banks from hardware-based to mobile-first and cloud-native authentication is causing persistent declines in hardware and maintenance revenue, and OneSpan's slower shift to cloud-native solutions risks further market share loss and stagnating revenue growth relative to faster-moving competitors.
  
• Increased adoption of open-source security tools and intensifying competition from large tech players and disruptors are commoditizing authentication and e-signature markets, putting downward pressure on pricing and threatening to erode OneSpan's gross and net margins in the long term.
  
• OneSpan remains highly dependent on the financial services sector, and recent contraction among key banking clients-including accelerated customer attrition and asset sales-has already reduced annual recurring revenue growth, pointing to heightened exposure to sector-specific downturns and resulting volatility in revenues.
  
• The sunsetting of legacy products and challenging contract transitions (perpetual to term-based) are recurring headwinds, and recent revenue and ARR figures have relied heavily on acquisitive growth rather than organic expansion, raising concerns about long-term sustainable revenue and earnings momentum.
  
• Escalating R&D, sales, and operating costs-including those driven by integration of acquisitions like Nok Nok-could outpace revenue growth without sufficient pricing power or rapid scaling of new products, jeopardizing the company's ability to maintain strong profitability and compressing net margins.

Valuation

• The assumed bullish price target for OneSpan is $23.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of OneSpan'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 $23.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $272.1 million, earnings will come to $38.5 million, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $12.71, the bullish analyst price target of $23.0 is 44.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.