Rapid7 (RPD, Financial) is a leading cybersecurity company which provides a unified cloud-based platform. They were founded in 2000 and are a "visionary” leader in application and security testing according to Gartner. The cybersecurity market is growing rapidly at a 16.4% compound annual growth rate in recent years and is expected to reach $15.8 billion in size by 2026.
The company had its IPO in 2018, and since then, the stock is up by over 216%. There has recently been a large pullback in price by 26%, which could indicate a possible value opportunity. Let’s dive into the business model, financials and valuation to see why I am bullish on this stock.
Rapid7 operates a unified cloud security platform which enables customers to manage multiple security programs from a single solution. This saves companies from having to use multiple platforms, which is both more complex to manage and usually more costly. They offer this solution via software licenses and cloud-based software-as-a-service (SaaS) subscriptions.
Source: Rapid7 investor materials
Their platform includes a variety of applications from application security to threat intelligence and even automation. The automation process can be set up to monitor for misconfigurations or provide immediate attack response. Their insights application is also extremely powerful, and the company recently acquired Intsights for $322.2 millioni in cash and stock to expand their threat intelligence capabilities.
Rapid7 claims there is an opportunity for as much as $500,000 in annual recurring revenue (ARR) for the average customer on its books, which means there is substantial room for upselling opportunities.
Rapidly growing financials
Rapid7 has grown revenues from $411 in 2020 to $535 in 2021, representing an increase of 30%. This is in line with the company’s prior 28% CAGR. Gross profit came in at $366 million in 2021, and the SaaS segment's gross margin is excellent at 68%.
The company is operating at a loss of $120 million, partially due to investments of $160 million into R&D in order to grow and keep their platform at the cutting edge. I think this is a smart move as companies with high R&D spend tend to produce greater shareholder returns in the long term. It is also more tax efficient to operate at a loss sometimes.
Ninety-two percent of the revenue comes from existing customers, and they have high retention rates. In 2022, they are expected to turn a profit and generate free cash flow of $40 million.
Rapid7 currently has $223 million in cash and short term investments, which is great, but their long-term debt is fairly high at $812 million.
With regards to valuation, the GF Value chart, a unique intrinsic value calculation from GuruFocus, indicates the stock is modestly undervalued.
Catherine Wood (Trades, Portfolio)'s Ark Invest, which invests into disruptive and innovative technology companies, recently purchased shares of this stock in the fourth quarter of 2021, but then began selling in the first quarter of 2022 according to 13F filings with the SEC. Ark Invest has a five-year time horizon for its conviction picks but also trades stocks daily, so the reduction in position is by no means a reflection on the company in my eyes.
Overall, I believe Rapid7 offers an enticing value proposition to enterprise customers. A unified cloud based cybersecurity platform is what companies require to scale, increase agility and to protect the remote working environment. The stock is not exactly cheap, but it is undervalued compared to historic multiples and growth opportunities. The rising interest rate environment is compressing the multiples of all growth stocks at the moment, but when the macro economic situation starts to change, I would expect this company’s price multiples to expand once again.
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