On Thursday, Citi adjusted its stance on Rapid7 (NASDAQ:RPD), a NASDAQ-listed cybersecurity firm, by reducing its price target to $50 from the previous $52 while maintaining a Buy rating on the company's shares. The adjustment comes amid a period of frustration over the company's muted annual recurring revenue (ARR) growth, which only saw a 6% increase year-over-year.
Despite a significant outperformance in operating profit margin (OPM) and earnings per share (EPS), the tempered ARR growth, coupled with quarter-over-quarter shrinkage in net new ARR, has cast a shadow over Rapid7's stock and the broader vulnerability management (VM) market.
The analyst from Citi noted that the company's business stabilization efforts have been stubbornly resistant to showing a clear recovery in momentum, hampered by extended deal cycles and budget constraints, particularly in North America within the mid-market and large-enterprise segments.
Rapid7's internal reorganization and go-to-market realignment, along with new product bundles and packaging launches, have not yet yielded the expected turnaround. The company's delayed recognition of ongoing challenges led to a reduction in its forecast for ARR, tempering expectations from an aspirational fourfold increase in net new ARR in the second half of the year to a more modest two to threefold.
The preliminary calendar year 2025 ARR estimate suggests mid-single-digit growth and peak profitability, which does not inspire confidence in immediate estimate revisions or valuation recovery. According to the Citi analyst, investor skepticism is likely to persist until the company can demonstrate more consistent performance improvements.
Despite the lower price target and the challenges faced by Rapid7, Citi believes that the stock's valuation under 5x exit multiple and the potential for activist involvement provide a safety net, justifying the firm's continued endorsement of the stock with a Buy rating.
In other recent news, cybersecurity firm Rapid7 reported a 9% year-over-year increase in Annual Recurring Revenue (ARR), reaching $816 million, primarily due to its direct detection and response business. The company's year-end ARR is projected to be between $850 million and $860 million, indicating a 6% to 7% growth year-over-year.
Amid this positive financial growth, Jefferies initiated coverage on Rapid7 with a Buy rating, recognizing the company's established platform in the security sector. DA Davidson, however, maintained a Neutral stance on Rapid7, despite raising the stock price target to $35.00 following Jana Partners increasing its voting stake in the company to 13%.
Concurrently, RBC Capital adjusted its stance on Rapid7, moving the rating from Outperform to Sector Perform, citing anticipated market consolidation and increased competition. In addition, Rapid7 introduced the Command Platform at Black Hat, aimed at enhancing risk visibility and customer retention.
These are some of the recent developments shaping the trajectory of Rapid7 in the cybersecurity landscape.
InvestingPro Insights
Recent InvestingPro data provides additional context to Rapid7's financial situation, aligning with Citi's analysis. Despite the challenges highlighted in the article, Rapid7's revenue growth remains positive, with a 10.05% increase over the last twelve months as of Q3 2023. This growth, while modest, supports the company's efforts towards business stabilization.
InvestingPro Tips reveal that Rapid7 is expected to be profitable this year, which could be a positive sign for investors concerned about the company's financial health. However, it's worth noting that 4 analysts have revised their earnings downwards for the upcoming period, reflecting the cautious outlook mentioned in the article.
The company's high earnings multiple, as indicated by another InvestingPro Tip, aligns with Citi's view on the stock's valuation. This suggests that investors are still pricing in future growth potential, despite the current challenges in ARR growth.
For readers interested in a more comprehensive analysis, InvestingPro offers 5 additional tips for Rapid7, providing a deeper understanding of the company's financial position and market expectations.
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