3 Reasons to Sell QLYS and 1 Stock to Buy Instead

Over the past six months, Qualys’s shares (currently trading at $131.91) have posted a disappointing 5.5% loss, well below the S&P 500’s 10% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Qualys, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Qualys Not Exciting?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than QLYS and a stock we'd rather own.

1. Weak ARR Points to Soft Demand

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Qualys’s ARR came in at $678.4 million in Q3, and over the last four quarters, its year-on-year growth averaged 10.1%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Qualys’s revenue to rise by 8.1%, a slight deceleration versus its 13.1% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.

3. Operating Margin Rising, Profits Up

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Looking at the trend in its profitability, Qualys’s operating margin rose by 2.3 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 32.5%.

Final Judgment

Qualys isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 6.9× forward price-to-sales (or $131.91 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.

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