WithSecure extensive report: The European alternative for corporate cybersecurity

We reiterate our Accumulate recommendation and EUR 1.3 target price for WithSecure. WithSecure has undergone major changes over the past year or so, as the company has sharpened its strategy and adjusted its cost structure to reflect a slower-than-expected growth outlook. Despite this, the company's core business has continued to grow reasonably well in recent quarters and its profitability has developed favorably. Although the weak economic environment and intense competitive pressure in the cybersecurity market continue to create uncertainty about future growth, the stock's valuation (EV/S 1.1x) seems low for a turnaround that is well underway. We also expect the divestment of the consulting business, which is expected to take place this year, to support the share price.

SaaS-based cybersecurity provider for mid-market  companies

In its strategy, updated in October 2023, WithSecure will focus on becoming a SaaS-based cybersecurity provider for the mid-market, leveraging its strong partner channel to achieve sales scalability. WithSecure focuses on serving mid-sized customers (200-2,000 employees) with its Elements software platform and complementary Co-Security services. This target group has a clear need for protection against targeted attacks, but with limited cybersecurity budgets available, they want to get the most out of their security investments. WithSecure is able to offer competitive products for this target group and already has a large network of partners to scale sales.

Large and fast-growing markets with fierce competition

WithSecure operates in a strong long-term growth market for corporate cybersecurity, where the cooling economic environment has reduced near-term growth prospects and increased competition. Although the development of the competitive landscape in recent years looks worrying from WithSecure's point of view in some respects (e.g. the rise of Microsoft), the still very fragmented and large market offers WithSecure good room for growth. In a large market, there will always be pockets where small and medium-sized specialized players can operate. In the competitive field, WithSecure is profiled as a notable European alternative against the America-dominated group of main competitors. Overall, however, we believe that fierce competitive pressure in the market is one of the key long-term threats to WithSecure's growth story, both in terms of growth multiples and potential pricing pressure on profitability.

With turnaround well underway, valuation looks low

WithSecure's EV/S multiple for the current year (1.1x) seems very low in the context of software companies, although the combination of growth and profitability (Rule of 40: 2024e-2025e: 2-5%), which is still very modest at group level, does not suggest particularly high multiples. Beneath the surface, however, the current valuation seems low relative to the progress of the ongoing turnaround in the core business. Also, the EV/ARR ratio (2.0x) relative to annual recurring revenue for cloud-based products does not set a high bar for continued growth and profitability. SOTP also indicates that the stock has upside potential (EUR 1.3/share, range EUR 1.1-1.6), and in a good scenario the multiples for the software business could be even higher.