FedRAMP Authorization Will Unlock Significant Opportunities With Federal Agencies

Key Takeaways

• Expansion of the partner ecosystem and investments in R&D and SOC are set to bolster profitable, scalable revenue growth.
  
• Federal opportunities and integrated risk management could expand market leadership, positively affecting revenue and ARR.
  
• Increased competition and reliance on federal funds create risks to revenue growth and profitability, while R&D investments may not yield immediate returns.

Catalysts

Provides cybersecurity software and services under the Rapid7, Nexpose, and Metasploit brand names.

• The expansion of the partner ecosystem to drive more efficient growth, with 80% to 90% of new ARR booked through the channel, is expected to bolster revenue growth.
  
• Strategic investments in a new Security Operations Center (SOC) in India and in R&D initiatives are anticipated to enhance profitability and support scalable growth, impacting operating expenses and potentially improving net margins.
  
• The transition to an integrated risk and exposure management market, driven by the Exposure Command product, is poised to increase ARR and expand market leadership, positively affecting revenue.
  
• The anticipated FedRAMP authorization for risk and exposure management offerings could unlock significant opportunities with federal agencies, driving increased ARR and revenue.
  
• Reinvesting up to $30 million into growth initiatives, including MDR service extensions and Exposure Command enhancements, is expected to reaccelerate growth, improving both revenue and net margins over time.

Rapid7 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rapid7's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $54.5 million (and earnings per share of $0.71) by about July 2028, up from $26.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $67.9 million in earnings, and the most bearish expecting $26.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.1x on those 2028 earnings, down from 55.3x today. This future PE is greater than the current PE for the US Software industry at 46.9x.
• Analysts expect the number of shares outstanding to grow by 2.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.81%, as per the Simply Wall St company report.

Rapid7 Future Earnings Per Share Growth

Risks

• Rapid7 faces secular decline and increased competitive pressure in the traditional vulnerability management segment, which could impact ARR growth and overall revenue (Earnings).
  
• Extended deal cycles due to larger deal sizes and lower contract durations pose a risk to timely revenue recognition and may impact short-term cash flow (Free Cash Flow).
  
• Increased competition in the cloud security and exposure management markets may lead to pricing pressure, impacting margins and profitability (Net Margins).
  
• Investments in new R&D and expansion initiatives, including a new innovation center in India, involve upfront costs that may not yield immediate returns, affecting near-term profitability (Operating Income).
  
• Uncertainty and disruption with certain state, local, educational, and healthcare customers due to reliance on federal funds could introduce unpredictability in revenue streams and affect net new ARR growth (Revenue).

Valuation

• The analysts have a consensus price target of $30.9 for Rapid7 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $954.3 million, earnings will come to $54.5 million, and it would be trading on a PE ratio of 51.1x, assuming you use a discount rate of 9.8%.
• Given the current share price of $22.59, the analyst price target of $30.9 is 26.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.