Shareholders of Rapid7 would probably like to forget the past six months even happened. The stock dropped 42% and now trades at $22.39. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Rapid7, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Rapid7 Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why RPD doesn't excite us and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Rapid7’s billings came in at $197.4 million in Q1, and over the last four quarters, its year-on-year growth averaged 4.6%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Rapid7’s revenue to rise by 2%, a deceleration versus This projection is underwhelming and implies its products and services will see some demand headwinds.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Rapid7’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 17.8% for the last 12 months will decrease to 15.8%.
Final Judgment
We see the value of companies addressing major business pain points, but in the case of Rapid7, we’re out. Following the recent decline, the stock trades at 1.7× forward price-to-sales (or $22.39 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Rapid7
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