After 30% Recovery Since March, Could Qualys Rise Further?

After a 30% rise since the March 23 low of this year, at the current price of around $101 per share, we believe Qualys’ stock (NASDAQ: QLYS) has a moderate upside left. Qualys’ stock has increased from $78 to $101 since 23rd March, less than the S&P which increased by around 50%. The recovery in the stock price was helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The rise in stock price was also helped by the announcement of a cloud-based remote endpoint protection solution by Qualys which allows IT and security teams to protect the computers of remote employees. The solution was provided as a 60-day free trial to existing customers. In the recent earnings the company beat consensus and announced general availability of Qualys VMDR (Vulnerability Management, Detection, and Response), which provides the ability to discover, assess, prioritize, and patch critical vulnerabilities in real time, all from a single solution.

The stock currently is 70% above the levels at which it was at the end of 2017 and has crossed the pre-Covid (February 2020) high of $94. Currently we believe that the company’s stock has a moderate upside left as there is no clarity with regards to the abatement of the crisis. Our dashboard What Factors Drove 70% Change In Qualys Stock Between 2017 And Now? has the underlying numbers.

Some of the stock price rise in the 2017-2019 period is justified by the 39% growth in revenues. Qualys’ revenues increased from $231 million in 2017 to $322 million in 2019. An improvement in net income margin from 17.5% in 2017 to 21.6% in 2019 helped net income swell 71% over the period. On a per share basis, earnings increased by 64% from $1.08 in 2017 to $1.77 in 2019.

As earnings grew, the P/E multiple fell from 55x in 2017 to 47x in 2019. The multiple shot up in 2020 and currently stands at 57x. We believe that the market has been optimistic about the cloud-based software companies, which has led to the rise. There could be a downside in Qualys’ multiple when compared to levels seen in the past years – P/E of 47x at end of 2019 and P/E of 51x in 2018.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Qualys’ stock is up by about 32% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index was up by 5%. Despite the coronavirus pandemic the company saw a 13% growth y-o-y in Total revenues for Q2 2020 while EPS was recorded at $0.64, up by 64% y-o-y. Due to work from home initiatives from most companies, Qualys saw a strong uptake of its free Remote Endpoint Protection offering, with over 650 companies, including nearly 300 customer prospects, actively using the service. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for software and services.

In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on 2021 results.

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