Shareholders of Qualys would probably like to forget the past six months even happened. The stock dropped 32.7% and now trades at $88.16. 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? See what our analysts have to say in our full research report, it’s free.
Why Is Qualys Not Exciting?
Even with the cheaper entry price, we're cautious about Qualys. Here are three reasons you should be careful with 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 $204.9 million in Q4, and over the last four quarters, its year-on-year growth averaged 8.3%. 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 7.8%, a slight deceleration versus its 13% annualized growth for the past five years. This projection doesn't excite us and indicates 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.
Analyzing the trend in its profitability, Qualys’s operating margin rose by 2.4 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 33.2%.
Final Judgment
Qualys isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 4.3× forward price-to-sales (or $88.16 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Qualys
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