Shareholders of Qualys would probably like to forget the past six months even happened. The stock dropped 38.3% and now trades at $92.62. This might have investors contemplating their next move.
Is now the time to buy Qualys, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Qualys Not Exciting?
Despite the more favorable entry price, we're swiping left on Qualys for now. Here are three reasons we avoid QLYS 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 $167.5 million in Q1, and over the last four quarters, its year-on-year growth averaged 9.1%. 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 7.7%, a slight deceleration versus its 12.9% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
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 metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Qualys’s operating margin rose by 2.5 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 33.7%.
Final Judgment
Qualys isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 4.6× forward price-to-sales (or $92.62 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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