This Highly Profitable Cybersecurity Stock Could Be a Huge Winner
By Herve Blandin
It is leveraging its platform to expand into growing cybersecurity markets. Despite better-than-expected second-quarter results and raised guidance, Qualys’ (NASDAQ:QLYS) full-year revenue growth will likely keep decelerating in 2020. However, the cybersecurity specialist is making inroads on its efforts to reverse that negative trend and thrive over the next several years. Here’s why.
Growth and profits
Qualys provides cloud security, compliance, and related services. It’s vulnerability management legacy activity consists of detecting and responding to security risks such as misconfigurations and unsafe software. That 20-year-old business remains essential. A survey published by ServiceNow indicates 60% of cybersecurity breach victims over the past two years didn’t apply an existing patch to a known vulnerability — a situation that Qualys’ solutions remediate.
Over the last several years, the company has been leveraging its platform to try and encourage additional services to clients and grow its total addressable market from $12.1 billion in 2016 to an estimated $21.3 billion by 2021, according to management. At the end of 2019, it launched 20 cybersecurity products that cover certificate management, cloud-based security capabilities, and more. That comprehensive portfolio allows Qualys to cross-sell its products by offering its customers the possibility to implement several security features with one integrated solution.
However, with scale and low sales and marketing expenses as a percentage of revenue, the company’s top-line growth has been decelerating. Management forecast full-year revenue to land in the range of $359 million to $360.5 million, which corresponds to revenue growth of 12%, down from 21% and 15% in 2018 and 2019, respectively.
Also, that low-double-digit growth rate doesn’t compare well to many cybersecurity competitors. For instance, the vulnerability management outfit Rapid7 and the endpoint protection specialist CrowdStrike (NASDAQ:CRWD) grew their revenue by 25% and 85%, respectively, last quarter.
Qualys’ lower growth rate is a result of its strategy. Instead of relying on heavy sales and marketing spending, it uses free offerings and trials to upsell its different solutions. That also explains why it generated a high trailing-12-month operating margin of 26%, which contrasts with its competitors’ losses.
Expanding to growing cybersecurity markets
However, Qualys’ top-line growth should improve over the next several years because the company is addressing two new, and growing, cybersecurity markets by further leveraging its existing platform.
Last month, Qualys entered the endpoint detection and response (EDR) market with its new EDR solution. That will give the company exposure to the endpoint security market, which MarketsandMarkets estimates will grow by 7.6% annually and reach $18.4 billion by 2024.
That space has become crowded, but Qualys offers a differentiated EDR product fueled by the information it gathers from its vulnerability management business. Granted, CrowdStrike is following a similar path with its vulnerability management capabilities. But CrowdStrike covers only endpoints, while Qualys deals with whole computing infrastructures, which provides more contextual information to better deal with threats.
Looking forward, Qualys is hoping to offer a beta version of a security information event management (SIEM) solution by the end of this year. SIEM products store the information many computing devices generate in one place for analysis. And that SIEM market seems attractive, too: MarketsandMarkets anticipates it will grow by 5.5% annually and reach $5.5 billion by 2025.
Again, Qualys will leverage its infrastructure, as it plans to use the sensors that monitor infrastructures for its vulnerability business to bolster its SIEM solution. That will attract customers looking to consolidate their cybersecurity footprint.
Potential for a higher valuation
Still, Qualys’ enterprise value-to-sales and forward price-to-earnings (P/E) ratios of 13.2 and 48.1, respectively, remain elevated.
But you should keep in mind that in contrast with many high-growth tech stocks, Qualys is already highly profitable despite its modest scale. And that profitability is unlikely to wane, as the company will be expanding its businesses to growing markets by leveraging its existing platform.
In addition, with $445.3 million of cash, cash equivalents, and marketable securities and no debt, the company seems immune from financial difficulties should a prolonged recession materialize.
Thus, investors should focus on the progress of Qualys’ initiatives in its new EDR and SIEM businesses over the next few quarters because solid results should boost the company’s valuation.