On Friday, September 20, RBC Capital Markets downgraded Rapid7 (NASDAQ: RPD) from “Outperform” to “Sector Perform” and lowered its price target from $50 to $40.
This move reflects rising concerns over the increasingly competitive landscape of the vulnerability management (VM) market, where Rapid7 is a major player.
RBC analysts acknowledged that while the company’s Q2 2024 results showed signs of stabilization, it could take more time for changes in Rapid7’s go-to-market (G2M) strategy and product development to positively impact financial performance.
With larger platforms like CrowdStrike, Microsoft, and Cisco absorbing market share, Rapid7 faces stiff competition in its core market.
Despite efforts to diversify into cloud security and security information and event management (SIEM), Rapid7’s expansion into these areas has yet to significantly boost growth, as both remain highly competitive markets.
As larger competitors dominate the VM space, questions loom about Rapid7’s ability to sustain its growth.
Adding to these challenges is the company’s advertising business, which is struggling, and a slowing pace in annual recurring revenue (ARR) growth.
Canaccord upgrades RPD stock
In contrast to RBC’s downgrade, Canaccord Genuity upgraded Rapid7 to “Buy” in August after the company exceeded revenue expectations in Q2, despite a slowdown in net-new ARR growth during Q1.
Canaccord also cited improved profit margins—rising to 19%, up 12 percentage points year-over-year—as a positive sign.
However, even Canaccord adjusted its price target downward from $52 to $43, reflecting broader macroeconomic pressures impacting high-growth tech stocks like Rapid7.
Rapid7 strong Q2
Rapid7 reported strong Q2 2024 results, with revenue growing by 9.5% year-over-year to $208 million, beating Wall Street estimates.
ARR rose by 9% to $816 million, and product subscription revenue increased by 10% to $200 million.
The company also posted non-GAAP earnings per share of $0.58, surpassing expectations by $0.06, and generated $29 million in free cash flow, indicating solid operational efficiency despite macroeconomic headwinds.
However, professional services revenue declined 9% year-over-year, highlighting uneven performance across its revenue streams.
Rapid7’s growth concerns
While Rapid7’s recent performance has been strong, concerns remain about its ability to reignite growth.
ARR growth has decelerated for ten consecutive quarters, and the company continues to face tough competition from larger players.
Rapid7’s recent innovations, including the launch of its Command Platform, which offers customers enhanced risk visibility, may not deliver meaningful financial results until the end of FY24 or later.
The company has also started seeing positive results from its strategic shift toward channel partnerships, but these relationships take time to mature and are unlikely to significantly impact short-term growth.
This long-term investment approach could frustrate investors seeking quicker returns.
Rapid7 valuation
Rapid7 is currently trading at roughly 3x its projected 2025 enterprise value-to-sales (EV/S) and 15x its anticipated 2025 free cash flow (FCF).
While this suggests limited downside potential, analysts caution that competitive pressures may cap any significant upside.
Canaccord’s $43 price target implies potential growth from current levels but with little room for error.
Looking ahead, Rapid7’s guidance for Q3 2024 points to modest revenue growth of 5-6%, with ARR expected to reach $850-$860 million.
The company anticipates non-GAAP earnings per share of $0.50 to $0.53, aligning with Wall Street expectations.
Rapid7’s recent performance highlights both challenges and opportunities, but the real question for investors now is whether the stock’s recent moves reflect all of these factors or if there’s more downside ahead.
To answer that, it’s essential to examine the price trends, key technical levels, and indicators that could signal the stock’s next move. Let’s turn to the charts to uncover what lies ahead for Rapid7’s stock trajectory.
Rapid7 stock: weak across timeframes
After hitting an all-time high above $140 in late 2021, Rapid7’s stock fell to below $30 by the end of 2023.
The stock did see a resurgence in 2023, doubling in price and reaching levels near $60 at the end of that year.
Source: TradingView
However, this year it has given up all those gains as it now trades down more than 40% year-to-date.
Currently, the stock is displaying weakness across timeframes and is trading extremely near its short-term support level of $32.8.
If it falls below that level, it can fall to significantly lower levels.
Hence, investors who have a bullish outlook on the stock must refrain from initiating fresh long positions at current levels.
Traders who are bearish on the stock must wait for it to fall below $32.8. If it does, they can initiate a short position with a stop loss at $36.4 and a profit target of $25.3.
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