The need for cyber security is growing – and so is the investment potential

Maxim Manturov (Freedom Finance Europe)

MAXIM Manturov, Head of Investment Research at Freedom Finance Europe, details the market capability of cyber security company Rapid7, a stock with a current growth potential of over 80%

The digitalisation of companies is opening up new opportunities for criminals. Based on expert forecasts, the demand for cyber security products will grow in the coming years. Now is the ideal time for investors wanting to diversify their portfolios to add stocks in this area so as not to miss out on possible profits.

Rapid7, Inc. offers customers enhanced cybersecurity through an increase in visibility, analytics and automation. Their products range from incident detection and response to vulnerability risk management and application-based cloud security for threat analysis and the automation of routine tasks.

Growing trends in the industry

In Q3 2022, the number of global cyber attacks increased by 28% compared to 2021, with the average number of attacks per week surpassing the 1,130 mark, according to a Check Point survey. AAG also reports that 76% of survey respondents said that their organisation had experienced at least one cyberattack in a year, up from 55% in 2020.

The statistics by industry show that healthcare (+60% year-over-year) and finance (+40% year-over-year) are among the most vulnerable in terms of the number of attacks. Given that the cost of data leakage is highest in these industries and is increasing year on year, this poses a significant threat. However, for Rapid7, this presents as an opportunity to support the healthcare and finance industries to keep customer’s money and sensitive personal data safe.

Looking at the breakdown by region from Check Point’s research, in Q3 2022 the increase in weekly cyber attacks in North America was at 47% and 22% in Europe. In 2021, these regions generated ~53% of total global GDP, which suggests that there will be interest from US and European organisations to invest in cyber defence.

As 79% of Rapid7’s revenue is generated in North America, an increase in cyber attacks in the region could significantly accelerate the company’s growth rate.

The potential of Rapid7

The market’s need for greater cybersecurity is reflected in Rapid7’s results. Rapid7’s annual recurring revenue (ARR) from Q3 2018 to Q3 2022 showed an average growth rate (CAGR) of 33%.

Rapid7 aims to increase its annual recurring revenue both by increasing its customer base and by growing revenue per customer. Between 2019 to 2022, the average annual growth rate of ARR per customer was 16%. Customer acquisition activity is also paying off, with the number of users increasing year-on-year from 10,283 to 10,791.

Additionally, Rapid7’s global volume of leads exceeds 74,000, and each medium-sized client has the potential to increase the company’s ARR by $500,000 (£408,000) per year.

For Q4 2022, management expects revenue in the range of $179-$181 million (£146-£147 million), non-GAAP operating profit in the range of $14-$16 million (£11.4-£13 million), and free cash flow in the range of $23.8-$27.8 million (£19.4-£22.6 million). If management forecasts are accurate, the company’s Q4 operating margin will improve from -6% to 9% year on year, which may have a positive impact on stock price.

Financial indicators and evaluation

Rapid7’s trailing-twelve-month (TTM) revenue is up from $496.9 million (£405.4 million)  to $652.2 million (£532 million) while TTM operating profit is down from -$100 million (-£81.5 million)  to -$139 million (-£113 million). In terms of operating margin, there is a decrease of between -20.1% to -21.3% due to an increase in the cost of revenue from 30.8% to 32.1%

Based on the results of the most recent reporting period, revenue is up from $139.9 million (£114,1 million)  to $175.8 million (£143.2 million) while operating profit is up from -$34.3 million (-£27.9 million) to -$23.2 million (-£18.9 million), in terms of a percentage increase it is up from -24.5% to -13.2%. Furthermore, net profits are up from -$37.7 million (-£30.7 million) to -$28.7 million (-£23.4 million) or -26.9% to -16.3%.

Despite the high base effect of 2021, which was further compounded by the new challenges of 2022, Rapid7 reported strong financial results in the last quarter. Based on this, there is an expectation for further improvement in financial performance in Q4. Their cash and liquid assets total $251.6 million (£205.2 million) while their net debt lies at $563.4 million (£459.5 million)

The company has an adequate level of debt, however Rapid7 is generating losses at its current stage of development, which does increase the level of risk for investors. In terms of trading multiples, the company is more expensive than its peers on most metrics except enterprise value-to-sales (EV/S). These multiples adequately reflect Rapid7’s further growth potential.

Rapid7 is a prime choice for investors looking to expand their portfolios in the cyber security sector. In the current cyber crime landscape, there appears to be few companies as capable as Rapid7 to fully capitalise on the need for better cyber security and is set to experience huge growth in the coming years.

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