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Rapid7: Great Returns Are Ahead

Rapid7 (RPD) has been on stock market for a very short time – since its IPO in July 2015. Despite that, the company has caught my interest, and I started learning more about it. Rapid7 seems to have a great ability to manage its assets well. The market is telling a different story, as the company’s stock has lost more than 50% of its value since the first day of trading. I think the major reason for that is that investors are cautious about the stock because the company simply does not have a long enough track record (if you study this matter deeper, you will see that most IPO stocks fall significantly in the first six months after the IPO. Lock-up periods can partially explain that). In addition, the market volatility in August 2015 and the beginning of 2016 did not help the matters, either. 

(Source: stockcharts.com) 

There are several catalysts that are rooted in fiscal 2015 but will grow into 2016 and will partially affect the company’s valuation in 2017. A positive short-term factor is the press release on the last fiscal year’s results. Corey Thomas, the President and Chief Executive Officer of Rapid7, said this in the news release: 

“Our strong performance in the fourth quarter reflects the healthy demand for security data and analytics, our solid execution, and the momentum that we are building” (Source: corporate website). 

Regarding the company’s pipeline, he stated: 

“Our products and services drove strong new customer growth across both enterprises and the mid-market. As we look towards 2016, we are positive on the demand environment and our opportunity as companies shift toward building pragmatic security programs and making thoughtful investments in security data and analytics” (Source: corporate website). 

The company has demonstrated the following annual results in 2015: 

- For the full-year 2015, total revenue was $110.5 million, an increase of 44% year-over-year, driven by broad-based demand across the business.

- Operating cash flow used for the full year was ($1.9) million compared to cash used in operations of ($3.4) million in 2014.

- Non-GAAP professional services gross margin increased to 21% for the full-year 2015, as compared to 14% in 2014. 

(Source: corporate website). 

Rapid7 is a growth company, which currently finds itself in an explosive expansion mode: 

“Growth Across Geographies: For the full-year 2015, total revenue from North America increased 43% year-over-year to $96.4 million and comprised 87% of total revenue. Total revenue from international increased 49% year-over-year to $14.1 million and comprised 13% of total revenue” (Source: corporate website). 

There are a couple of things that we can infer from the annual report. First, the company has been successfully using shareholders’ capital to grow and expand. Secondly, the growth rates in the top line indicate that the company’s services are in strong demand. 

Among other things, Rapid7 has achieved the following milestones in 2015: 

- It announced that AppSpider, its web application security testing solution, can now automate the testing of APIs documented in the Swagger format. Through this automation, Rapid7 is helping customers reduce the risk associated with their web applications and enabling IT security teams to manage resources more effectively. AppSpider is Dynamic Application Security Testing (DAST) software that assesses applications for vulnerabilities across modern technologies, provides tools that speed remediation, and monitors applications for changes. 

- The company has launched Analytic Response for Advanced Threat Detection, a fully managed service that gives customers continuous threat detection by identifying known threats, certain unknown threats, and intruder movement from the endpoint to the cloud. The service is part of Rapid7’s Incident Detection and Response offerings and combines threat insight with sophisticated user and attacker behavior analytics. It is monitored and managed by Rapid7’s security analysts, who have experience in hunting for dynamic threats and containing incidents to protect organizations.

 - It partnered with several firms in building a proactive approach to incident responses through table-top simulations, blue/red team exercises and threat modeling services, helping to enable companies to react from a position of increased knowledge should an incident occur. 

 - Rapid7 continued Robust Technology Partnerships with Industry Leaders: Rapid7 announced that its IT Search solution for scalable, real-time log management and search, has been recognized by Docker, the organization behind the open platform for distributed applications, as an Ecosystem Technology Partner (ETP) for logging. 

In the end of 2015, Rapid7 conducted surveys, which helped the company identify any missing features in its security products. This has given the company new challenges, which, I am sure, it can take on. 

As for this year, the company has recently launched Rapid7 InsightIDR, a disruptive new incident detection and response offering that enables security professionals to more quickly detect and investigate security incidents, so they can be contained to minimize the negative impact on the organization and its customers. (Source: corporate website) 

This year is expected be operationally challenging for the company, yet interesting for its shareholders. They should expect improving financial metrics, as the company keeps expanding its sphere of influence. In 2016, Rapid7 expects total revenues between $146.0 and $151.0 million, up 27% - 37% since 2015.

Conclusion 

Despite its short history on the public markets, Rapid7 has already proven that it has both the ambitions and the resources to take itself to the next level. I think that the stock has already plateaued and trades at a good level to help investors start accumulating positions in it. I am bullish on the stock and think that the current price level is attractive. This is especially true, now that the Fed has kept the rates unchanged, and the market volatility has declined.

Posted with the permission of Kirill Tirskhih.