OSPN: Broader AI Integration Will Drive Demand in Secure Banking Transactions

Key Takeaways

• Strategic acquisitions and focused cross-selling drive growth in recurring software revenue, customer retention, and global market penetration.
  
• Shift to subscription-based offerings, increased R&D, and innovation position the company for sustained profitability and long-term expansion in cybersecurity.
  
• Ongoing revenue and margin pressures persist due to declining legacy streams, execution challenges, reliance on acquisitions, and increasing competition outpacing product innovation.

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.

• The acquisition of Nok Nok Labs expands OneSpan's authentication portfolio into software-based FIDO2 capabilities, positioning the company to capture accelerating demand for advanced, passwordless authentication as digital banking and digital transformation trends accelerate; this is likely to drive higher ARR and subscription revenue growth from both existing and new customers over the next several years.
  
• The company's focused cross-selling strategy, leveraging its large global base of over 1,000 banks, is seen as a catalyst for higher average revenue per customer and increased customer stickiness, supporting more predictable recurring revenue streams and improved net retention rates as institutions face growing cybersecurity and regulatory needs.
  
• Ongoing transition from hardware to SaaS and subscription-based software offerings is driving significant gross margin expansion (from 66% to 73% year-over-year) and higher EBITDA margins, providing operating leverage that should support net income and earnings growth as lower-margin products sunset.
  
• Expansion of dedicated sales efforts in high-potential North American markets, previously under-penetrated in security, is starting to pay off and is expected to accelerate top-line and ARR growth as the region is further developed, helping to geographically diversify revenues.
  
• The company's investments in R&D under new technology leadership and targeted M&A, combined with secular increases in threat sophistication (such as AI-driven account takeover attacks), increase the likelihood of sustained product innovation and long-term growth in cybersecurity spending, supporting ongoing revenue and earnings expansion.

OneSpan Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OneSpan's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.0% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $21.6 million (and earnings per share of $0.72) by about April 2029, down from $72.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $14.0 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 34.0x on those 2029 earnings, up from 5.9x today. This future PE is greater than the current PE for the US Software industry at 30.1x.
• Analysts expect the number of shares outstanding to decline by 2.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Risks

• The ongoing shift of banks in EMEA and APAC to mobile-first authentication strategies continues to drive a secular decline in security hardware revenues, and this headwind is only partially being offset by gains in software and subscription growth, potentially impacting overall revenue growth and gross margins in the long term.
  
• The transition away from legacy/perpetual maintenance contracts and the sunsetting of legacy products is leading to persistent contractions in maintenance revenue and some loss of recurring ARR, with headwinds expected to continue and affect both topline growth and net retention rates.
  
• A history of inconsistent growth in net new ARR, customer contraction (notably, a $3 million year-over-year ARR decline from just two large customers), and delayed customer implementations could indicate challenges in pipeline execution, which may weigh on recurring revenue and suppress earnings if not reversed.
  
• Dependence on targeted M&A (such as the recent Nok Nok acquisition) for portfolio expansion, rather than sustained organic innovation, exposes OneSpan to integration risks and may limit the pace of cross-selling or upselling, potentially diluting operating leverage and hampering earnings progress.
  
• Heightened competition from integrated, multi-solution security vendors and rapid adoption of emerging authentication approaches (such as AI-based fraud prevention or advanced biometric and behavioral security) could outpace OneSpan's product evolution and erode market share, thereby increasing pricing pressure and negatively affecting revenue and net margins over time.

Valuation

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

• The analysts have a consensus price target of $16.25 for OneSpan based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $259.3 million, earnings will come to $21.6 million, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of $11.44, the analyst price target of $16.25 is 29.6% higher. Despite analysts expecting the underlying business 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.