Potential is a tricky thing. There's no question that significant growth potential can fuel the valuation on software stocks like Qualys (NASDAQ:QLYS), but failure to execute on that potential can bring about sharp corrections and high levels of volatility. Qualys has had its challenges on the execution front over the years, but the roughly 35% increase in the share price over the last year leads me to think that investors are back to focusing on the potential, as the company looks to leverage sizable ongoing cross-selling opportunities, new product launches, and an improved go-to-market strategy.
While the opportunity is there, at least in terms of dollar volume of addressable market, I think a 5x EV/revenue multiple on 2017 is an ample reflection of that opportunity, particularly for a company that has had something less than a history of seamless execution. While the company's SaaS approach has its advantages and the Internet of Things (or IoT) is a credible opportunity, the valuation is a challenge for a company that I don't see as bringing game-changing technology into the security space.
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Qualys Has To Execute Better To Live Up To Its Multiple