3 Reasons to Sell QLYS and 1 Stock to Buy Instead

Over the past six months, Qualys’s stock price fell to $136.36. Shareholders have lost 7.3% of their capital, disappointing when considering the S&P 500 was flat. This may have investors wondering how to approach the situation.

Is now the time to buy Qualys, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Qualys Not Exciting?

Despite the more favorable entry price, we're cautious about Qualys. Here are three reasons why QLYS doesn't excite us and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Qualys’s billings came in at $153.1 million in Q1, and over the last four quarters, its year-on-year growth averaged 5.2%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

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 6.6%, a deceleration versus its 13.3% annualized growth for the past three years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

3. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Qualys’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 41.2% for the last 12 months will decrease to 33.6%.

Final Judgment

Qualys’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 7.6× forward price-to-sales (or $136.36 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Would Buy Instead of Qualys

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