Rapid7: Launching Coverage With a No-Moat Rating and $45 Fair Value Estimate; Shares Fairly Valued

We are initiating coverage of Rapid7 RPD 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.

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 investments to expand its portfolio may take time to bear fruit.

The cybersecurity space continues to grow in threat complexity and intensity. As firms undergo digital transformations that expand their online footprints, the number of attack vectors is rapidly increasing. In this evolving landscape, we see information technology security teams opting for vendors that offer multiple security solutions versus point solutions that can inadvertently create data silos. Here, vendors like Rapid7 can displace point solutions with interoperable modules.

While the spike in nefarious activity has induced greater cybersecurity spending, it has also brought on intense competition among vendors. Rapid7′s competitors include large public cloud vendors such as Microsoft, as well as pure-play cybersecurity providers such as CrowdStrike. These reputable firms provide solutions which directly compete with Rapid7′s modules, laying a tough competitive landscape for the smaller Rapid7.

We forecast Rapid7′s revenue growing at a 15% compound annual growth rate over the next five years. We expect growth to be driven by increased adoption of higher-growth modules from both new and existing customers. While we expect vulnerability management solutions to remain the lion’s share of revenue in the coming years, we forecast its proportion of total sales to lessen overtime with the firm’s diversified offerings.