Cybersecurity (or lack thereof) continues to make headlines. Vulnerabilities in ironically named Progress Software's MOVEit data-transfer service managed to expose the personal information of at least 60 million people. Meanwhile, over in Las Vegas, MGM Resorts and Caesars Entertainment were also recently hit by hackers. Even in 2023, lots of companies still need help with better cybersecurity services and procedures.
Investing in cybersecurity stocks is hard, though. Constant innovation makes it difficult for small companies to climb and stay atop the ladder in the security software industry, and it's harder still for them to sustain profitability over time.
One small company, Qualys (QLYS 0.36%), seems to have cracked the code. Will its stock soar in the coming years with cyberspace expecting plenty more growth ahead?
The not-so-exciting Qualys outperforms in this key area
As with most software these days, Qualys is a cloud-based security platform. Specifically, its approach to cybersecurity focuses on the measurement and management of risk in a company's IT operations, as well as security compliance services -- even for other cybersecurity companies.
In late 2022, it acquired a start-up called Blue Hexagon to add artificial intelligence (AI) and machine learning to its platform. This strengthened Qualys' chops in automation, an important feature since the amount of data floating around the web and cloud continues to expand at a rapid pace. A human team alone is no longer able to handle security needs without the help of AI.
Despite having all the prerequisite buzzwords attached to it (cloud, AI, automation, etc.), Qualys actually isn't the fastest-growing cybersecurity business. Platform companies far larger than it -- including cybersecurity industry pure-play leaders like Palo Alto Networks, Fortinet, and CrowdStrike Holdings -- have been expanding even faster.
Data by YCharts; TTM = trailing 12 months.
But what Qualys lacks in blistering growth, it makes up for in profitability. In fact, it reports great profit margins by all metrics, including net income under generally accepted accounting principles (GAAP) and free cash flow -- and has for a long time. Not many cybersecurity companies can say that. This might make it an attractive stock for investors looking for a good balance of growth and profitability.
Data by YCharts.
Is this a cybersecurity best buy?
Now, Qualys has been hit with a slowdown in 2023, much like other cloud-based software companies. Cybercriminal risk or not, customers are in cash conservation mode as they manage through a slowdown in global economic growth. Full-year 2023 revenue is expected to be up just 13%, compared to growth of 19% in 2022.
Nevertheless, though business is slowing a bit, Qualys has been able to control expenses and boost its cash. Guidance for GAAP earnings per share (EPS) was raised to a range of $3.07 to $3.22 during the second-quarter update, up from the previous range of $2.58 to $2.73.
It's clear that Qualys isn't trying to conquer the world, it's simply building a solid business that makes for a compelling investment opportunity. The market has picked up on this and has awarded the company a premium valuation: Shares currently trade for about 49 times expected current-year EPS, or about 28 times expected free cash flow for the year.
With that kind of premium already built in and growth slowing a bit, it doesn't look like Qualys stock will soar anytime soon. That holds me back from considering making a buy right now.
Nevertheless, Qualys has built a solid business in a hyper-competitive industry and is worth keeping tabs on. Perhaps as 2024 approaches, the company will reignite its growth engine and a more favorable buy point will emerge. Stay tuned.
