Offshore

⁠Dimitry Nakhla | Babylon Capital®
RT @DimitryNakhla: ~2 & 1/2 months ago I shared my “sober valuation analysis 🧘🏽‍♂️” on $QLYS stating:

“Albeit, for investors that prefer to consider the downside first (as myself) the current assumptions don’t leave us with a margin of safety

I’d become interested in $QLYS closer to 28x earnings or at $145💵 (~12.5% below todays price)

I understand I may be asking for too much on the valuation — however I don’t view it that way considering competition in the sector & $QLYS slowdown in growth which could lead to a re-rating in its multiple”

Since then, $QLYS dropped ~18% & is currently trading at $134.73💵, slightly below my $145💵 target

While I remain interested in $QLYS, I'm hesitant to add shares at present due to the competitive landscape, sector slowdown, preference to own $FTNT & $PANW over $QLYS, and the availability of other attractive opportunities in the market that have a wider moat

#stocks #investing"

A sober valuation analysis on $QLYS 🧘🏽‍♂️

•NTM P/E Ratio: 32.03x
•5-Year Mean: 37.39x

•NTM FCF Yield: 3.58%
•5-Year Mean: 3.63%

As you can see, $QLYS appears to be trading slightly below fair value

Going forward, investors can receive ~17% MORE in earnings per share & about the same in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $QLYS is a quality business

BALANCE SHEET✅
•Cash & Short-Term Inv: $425.56M
•Long-Term Debt: $0

$QLYS has an excellent balance sheet

RETURN ON CAPITAL✅
•2019: 16.5%
•2020: 20.9%
•2021: 23.7%
•2022: 39.4%
•2023: 41.1%

RETURN ON EQUITY✅
•2019: 18.6%
•2020: 23.1%
•2021: 16.9%
•2022: 29.8%
•2023: 46.1%

$QLYS has strong return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2013: $107.96M
•2023: $554.46M
•CAGR: 17.77%

FREE CASH FLOW✅
•2013: $11.43M
•2023: $235.82M
•CAGR: 35.34%

NORMALIZED EPS✅
•2013: $0.20
•2023: $5.27
•CAGR: 38.70%

SHARE BUYBACKS❌ / ✅
•2013 Shares Outstanding: 35.97M
•LTM Shares Outstanding: 37.60M

However, from 2018 - 2023, $QLYS reduced its shares outstanding ~10.2%, increasing its EPS by ~11.3% (assuming 0 growth)

MARGINS✅
•LTM Gross Margins: 80.6%
•LTM Operating Margins: 29.4%
•LTM Net Income Margins: 27.3%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~17% MORE in EPS & about the same in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $QLYS has to grow earnings at a 16.02% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2024 - 2026 EPS growth over the next few years to be less than the (16.02%) required growth rate:

2024E: $5.19 (-1.5% YoY) *FY Dec
2025E: $5.71 (10.1% YoY)
2026E: $6.67 (16.8% YoY)

$QLYS has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $QLYS ends 2026 with $6.67 in EPS & see its CAGR potential assuming different multiples

35x P/E: $233.45💵 … ~13.5% CAGR

32.5x P/E: $216.77💵 … ~10.4% CAGR

30x P/E: $200.10💵 … ~7.3% CAGR

As you can see, $QLYS needs to trade closer to >32.5x earnings for it to have double-digit return potential

This isn’t unreasonable given $QLYS historical valuation & financial efficiency — moreover, $QLYS has maintained fairly strong support near that 32.5x level

$QLYS appears to be a great business treading for a fair price

Albeit, for investors that prefer to consider the downside first (as myself) the current assumptions don’t leave us with a margin of safety

I’d become interested in $QLYS closer to 28x earnings or at $145💵 (~12.5% below todays price)

I understand I may be asking for too much on the valuation — however I don’t view it that way considering competition in the sector & $QLYS slowdown in growth which could lead to a re-rating [...]

2 views12:31