Where Will Rapid7 Stock Be In 5 Years?

Rapid7 Inc. (NASDAQ: RPD) has soared by 3x since it first came public almost a decade ago, a testament to the increasing demand for cybersecurity and its role as a leading provider of cybersecurity solutions.

The cybersecurity firm offers both advanced security data and analytics solutions to clients via three main categories:

• Insight Platform: A cloud-based platform that provides visibility and analytics for managing vulnerabilities, monitoring threats, and automating security operations.
• Nexpose: A vulnerability management solution that helps organizations identify, assess, and prioritize vulnerabilities.
• Metasploit: A penetration testing solution that helps security professionals identify and address security weaknesses.

The result has been that the company has successfully grown its customer base from approximately 10,000 customers at the end of 2021 to more than 11,500 customers as of December 31, 2023, across 151 countries, including 40% of the organizations in the Fortune 100.

So what does the future hold?

Market Tailwinds Favor Rapid7

Rapid7 has an advantage of being in the right place at the right time, operating in the cybersecurity market that is set to grow from $240 billion in 2022 to $345 billion by 2026, at a CAGR of 11.1%.

One market analyst observed that cybersecurity is akin to a war for enterprises where attacks take place daily. For some large companies, billions of cyber threats are fended off each year. 

For smaller companies, the resources simply are not there to adequately defend against the threats. It’s for that reasons some think the government should be involved in supporting small business against these attacks. In the meantime, however, companies like Rapid7 offer a comprehensive portfolio and numerous solutions.

For example, the Insight Platform is a key differentiator which provides a unified view of an organization’s security setup, and facilitates faster and more effective responses to threats. The platform’s scalability and ease of integration with other security tools make it popular both among small and large businesses.

A real feather in the firm’s cap too is that clients span various industries from finance to healthcare and from retail to government. That spread of industries leads to a more stable revenue stream and mitigates against sector-specific risks or exposure.

So what does it all boil to down when it comes to the financials?

Rapid7 On The Rise

Last year, Rapid7 management reported total revenue of $670 million, representing a year-over-year increase of 24%. The growth was largely attributable to strong demand for its cloud-based solutions and an expanding customer base.

One major drawback for conservative-oriented investors is that Rapid7 is not yet profitable on a GAAP basis but the company’s adjusted EBITDA has been showing positive signs of ticking up to $70 million from $50 million in 2022. 

So too have cash flows been looking good with the company generating $80 million in free cash flow, up from $60 million in the previous year. That cash flow is the oxygen of the firm allowing it to fuel acquisitions or simply reinvest in product enhancements.

Will Rapid7 Keep Going Up?

While it’s anyone’s guess what will happen today or tomorrow, the long-term trend looks positive for Rapid7 for a few key reasons. 

For one, the frequency and sophistication of cyberattacks are on the rise, driving the demand for advanced cybersecurity solutions like the ones Rapid7’s offers.

So too is the mass adoption of cloud-based infrastructure accelerating and that in turn creates security challenges for organizations which Rapid7 solves. The company’s cloud-native solutions are specifically designed to secure cloud environments.

Another growth driver, though often overlooked, stems from stringent regulatory requirements. As GDPR, CCPA, and HIPAA rollout, firms are compelled to invest in cybersecurity. 

Yet Rapid7 is by no means alone and faces a stiff competitive environment that features leaders like Palo Alto Networks, CrowdStrike, and Fortinet.

What we do know is, in spite of the threats from rivals, Rapid7 is clearly keeping customers happy. Management has reported an impressive customer retention rate with over 90% of customers renewing their contracts annually.

For those who have studied business KPIs, retention is a very key one because it costs more to acquire an existing customer than to serve an existing one. 

The sales team at Rapid7 should be commended too for doing a good job of upselling and cross-selling its products, resulting in an average contract value increase of 15% year-over-year.

And while organic growth has been impressive, management hasn’t been shy about buying technology when it fuels further growth. The Board has approved several acquisitions including of DivvyCloud, a cloud security platform, and IntSights, a threat intelligence company. 

So what does all this mean for the share price?

Where Will Rapid7 Stock Be In 5 Years?

Rapid7 is forecast to hit $54.22 per share according to a 5-year discounted forecast revenue exit model while 22 analysts forecast a share price of $48.73 per share.

In the company’s favor is the fact that net income is set to grow this year but the drawback is the company has not been profitable over the past twelve months and currently trades at a high multiple.

Perhaps of most note though is its forward revenue forecast over the next 5 years which is set to grow at 10.8% annually. If that proves true and profitability follows, the share price has the potential to realize the price targets set by both analysts and a DCF analysis.

For now, however, with a $1 billion of debt and a negative P/E multiple alongside so-so profitability metrics, it may be best for all but the most risk-seeking investors to watch a little longer from the sidelines.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.