Hyperscale Cloud Centralization Will Erode Third Party Security Demand

Key Takeaways

• Embedded security features in major cloud platforms threaten to reduce demand for Qualys’ tools as customers consolidate spending with larger providers.
  
• Shifts toward integrated security, regulatory hurdles, and aggressive competition could compress margins, slow growth, and erode Qualys’ market share.
  
• Strong industry demand, innovative platform expansion, and effective partner strategies position Qualys for resilient recurring revenue, improved margins, and competitive advantage amid rising cybersecurity needs.

Catalysts

Provides cloud-based platform delivering information technology (IT), security, and compliance solutions in the United States and internationally.

• The ongoing rise of cloud infrastructure managed by hyperscale providers such as AWS and Azure is likely to result in significant security capabilities being embedded natively in cloud offerings, which could substantially erode demand for Qualys’ third-party security tools and negatively impact future revenue growth as customers consolidate spend within the hyperscaler ecosystem.
  
• Increasing regulatory scrutiny around data privacy and cross-border data flows is expected to create additional compliance costs or impede Qualys’ ability to scale internationally, leading to margin compression and slower expansion of overall earnings power.
  
• The rapid shift towards integrated, all-in-one security platforms by larger enterprises may favor more diversified or horizontally integrated cybersecurity companies, leaving Qualys, with its reliance on vulnerability management and slower entry into adjacent markets, at risk of declining customer retention and weaker top-line growth.
  
• Intense competition and the accelerating pace of AI-driven security innovation among peers could expose Qualys’ slower innovation cycles, resulting in long-term erosion of market share and stagnation in revenue from its core product offerings.
  
• Growing industry consolidation may lead to dominant players bundling security solutions at aggressive price points, thereby elevating customer acquisition costs for Qualys and ultimately exerting sustained downward pressure on both net margins and earnings growth over the long run.

Qualys Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Qualys compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Qualys's revenue will grow by 4.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 29.2% today to 25.6% in 3 years time.
• The bearish analysts expect earnings to reach $181.3 million (and earnings per share of $4.9) by about July 2028, down from $181.5 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 24.8x on those 2028 earnings, down from 28.1x today. This future PE is lower than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

Qualys Future Earnings Per Share Growth

Risks

• The acceleration of digital transformation and the proliferation of cloud adoption are greatly expanding organizations’ cybersecurity needs, fueling persistent demand for unified cloud-native solutions like Qualys, which could drive sustained revenue growth and help maintain strong earnings.
  
• Intensifying regulation worldwide around cybersecurity and audit readiness is proving to be a strong secular tailwind, as organizations must invest in automated risk management, compliance, and evidence collection solutions—an area where Qualys is innovating and gaining customer traction, which could help stabilize and grow net margins.
  
• Qualys’ expansion and rapid innovation of its unified cloud platform—including new products like the Enterprise TruRisk Management (ETM) and TotalAI—are driving greater customer stickiness, furthering upsell opportunities, and increasing average revenue per user, which in turn supports predictable recurring revenues and long-term profitability.
  
• The company’s partner-first strategy is accelerating, with nearly half of revenue now coming through partners, international growth outpacing domestic, and partner-led bookings increasing, all of which could lower customer acquisition costs and expand revenue opportunities, thus improving earnings and operating leverage over time.
  
• As cyber threats escalate and enterprise customers seek to consolidate fragmented security tooling onto integrated platforms, Qualys’ ability to ingest and orchestrate data across its own and third-party solutions sets it up to benefit from industry consolidation, allowing continued margin expansion and top-line growth even as competitors enter the space.

Valuation

• The assumed bearish price target for Qualys is $105.23, which represents two standard deviations below the consensus price target of $136.11. This valuation is based on what can be assumed as the expectations of Qualys'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 $160.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $708.6 million, earnings will come to $181.3 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of $140.34, the bearish analyst price target of $105.23 is 33.4% lower.
• 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.