Subscription Transition And Cybersecurity Demand Will Define Future Market Position

Key Takeaways

• Transition to subscription-based sales and broader identity solutions positions Yubico for stronger margins, recurring revenue, and increased customer retention.
  
• Escalating demand from regulation and cyber threats, combined with early penetration in large enterprises, provides a runway for sustained market and earnings growth.
  
• Growing competition, technological shifts away from hardware, and external macroeconomic pressures threaten Yubico's revenue, profitability, and long-term market relevance.

Catalysts

About Yubico

Provides authentication solutions for use in computers, networks, and online services.

What are the underlying business or industry changes driving this perspective?

• The shift toward subscription-based sales (YubiKey-as-a-Service) is accelerating, particularly with large enterprise customers in the US and technology sectors, positioning Yubico for higher long-term revenue stability and margin expansion as recurring ARR flows through the P&L over coming years-even as this transition temporarily pressures reported sales and earnings.
  
• Increasing regulatory pressure and escalating cyber threats are driving more enterprises and public sector organizations globally toward adopting stronger authentication solutions, increasing the addressable market for Yubico's differentiated hardware-backed MFA products and setting the stage for sustained future revenue and market share growth.
  
• The company's "land and expand" strategy with large Global 2000 customers is still in early penetration phases (with most customers using YubiKeys for only a subset of users), providing a significant embedded runway for multi-year upsell and repeat orders, bolstering future top-line growth and earnings visibility.
  
• Expansion of Yubico's offering-moving from login-only protection to broader user-centric identity solutions (including potential M&A in ID verification)-can capture more of the growing market for secure digital identity, leading to higher ASPs, better customer retention, and improved gross margin over time.
  
• High gross margin (near 80% on product sales) combined with operational leverage from improved global distribution and channel partner programs will enable margin expansion as Yubico scales, supporting stronger long-term earnings growth as revenue accelerates with global digital transformation.

Yubico Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Yubico's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 15.3% in 3 years time.
• Analysts expect earnings to reach SEK 450.4 million (and earnings per share of SEK 4.29) by about August 2029, up from SEK 151.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK568.8 million in earnings, and the most bearish expecting SEK342.3 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 18.1x on those 2029 earnings, down from 52.5x today. This future PE is lower than the current PE for the SE Software industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Yubico's continuing reliance on hardware-based authentication solutions faces long-term risk from increasing adoption of biometric authentication and native operating system passkey implementations, which could gradually decrease the relevance and demand for physical keys-putting long-term pressure on core product revenues.
  
• The company's current high gross margins are sensitive to both sales volume and product mix; short-term declines in perpetual hardware sales as the business pivots towards subscription models are already resulting in lower net sales and EBIT, and persistent negative sales growth during the transition could reduce profitability and dampen investor sentiment.
  
• Intensifying competition from both incumbent smartcard vendors and new entrants pushing integrated passkey and software-first authentication tools may challenge Yubico's market share and pricing power, especially as enterprises increasingly evaluate bundled or cloud-native authentication solutions-threatening gross margin and future earnings growth.
  
• Foreign exchange volatility, particularly the impact of a strong Swedish krona against the US dollar (with over 80% of revenue in USD/euro), is placing downward pressure on reported top-line and margins, and continued currency headwinds could further erode reported revenues and profits over the long term.
  
• Exposure to US import tariffs (on hardware manufactured in Sweden and shipped to the US) is increasing Yubico's cost of goods sold by 1–1.5 percentage points, with possible further escalation; if Yubico cannot pass these costs on to customers, this could structurally impair gross margins and long-term profitability.

Valuation

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

• The analysts have a consensus price target of SEK80.0 for Yubico 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 SEK110.0, and the most bearish reporting a price target of just SEK60.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK2.9 billion, earnings will come to SEK450.4 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.7%.
• Given the current share price of SEK92.5, the analyst price target of SEK80.0 is 15.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.