Company Reports

We maintain our $45 fair value estimate for no-moat Rapid7 after the firm reported better-than-expected second-quarter results that were marginally ahead of our prior estimates. At the same time, however, we think Rapid7 occupies a tough, competitive area of cybersecurity. In an industry where vendor consolidation is on the up, smaller vendors such as Rapid7 are facing the squeeze. With the firm's Very High Morningstar Uncertainty Rating and lack of an economic moat protecting its business against larger vendors, we'd ask investors to avoid the name. Instead, for investors looking to invest in high-quality cybersecurity names, we'd point to moaty Fortinet, Palo Alto, Zscaler, and CrowdStrike as all attractive names currently trading at discounts to our fair value estimates.

We maintain our $45 per share fair value estimate for no-moat Rapid7 after the firm kicked off fiscal 2024 with a strong set of quarterly results offset by a surprise reduction in the firm’s 2024 top-line outlook. The reduction in the firm’s sales outlook for 2024 was primarily driven by poor execution as Rapid7 failed to gain customer traction for its Cloud Risk Complete offering. While the firm’s outlook calls for a sequential recovery in annual recurring revenue, or ARR, peppered throughout the remainder of the fiscal year, investors were spooked by the guidance cut, resulting in the firm’s shares dropping sharply after hours.

We maintain our $45 fair value estimate for no-moat Rapid7 after the firm reported fourth-quarter 2023 results above guidance and our expectations. In our view, the outlook provided for 2024 skews conservative on the top line. However, it implies attractive bottom-line expansion thanks to cost-structure improvements. While we see secular tailwinds in Rapid7’s favor, along with a more stable demand environment, we remain wary of the firm’s hypercompetitive market and exposure to macroeconomic swings. While shares traded down sharply afterhours, we continue to view the stock as slightly overvalued.

Rapid7 is a prominent vendor in security operations and threat detection, which we view as key components of the cybersecurity stack, and which stand to gain wallet share of customers' spending as firms digitize their workflows. While secular tailwinds blow in Rapid7’s favor, we are wary of the firm’s fierce competition and exposure to macro swings. We also anticipate that the firm’s investments to expand its portfolio may take time to bear fruit.

We maintain our $45 fair value estimate for no-moat Rapid7 after the firm reported third-quarter earnings in line with our revenue estimates, while delivering upside on profitability. Management increased its full-year 2024 outlook, as well as guiding for a sequentially stronger fourth quarter on the revenue front. While we see secular tailwinds blow in Rapid7’s favor along with a more normalized demand environment, we remain wary of the firm’s fierce competition and exposure to macroeconomic swings. With current shares up 8% after-hours, we view the stock as slightly overvalued.

Rapid7 is a prominent vendor in security operations and threat detection, which we view as key components of the cybersecurity stack, and which stand to gain wallet share of customers' spending as firms digitize their workflows. While secular tailwinds blow in Rapid7’s favor, we are wary of the firm’s fierce competition and exposure to macro swings. We also anticipate that the firm’s investments to expand its portfolio may take time to bear fruit.

We are initiating coverage of Rapid7 with a fair value estimate of $45 per share, no economic moat rating, and a Very High Uncertainty rating. We currently view shares as fairly valued and trading in 3-star territory.