Traditional Security Solutions Will Falter As Cloud Hyperscalers Expand

Key Takeaways

• Heavy dependence on legacy offerings and slow customer upgrades exposes Rapid7 to commoditization and erosion of market relevance amid larger platform competition.
  
• Rising compliance costs and embedded security solutions from cloud providers threaten international expansion, revenue growth, and sustained profitability.
  
• Rapid7's focus on integrated platforms, international expansion, operational efficiency, and AI-driven innovation positions it for resilient growth and improved profitability despite challenging macro conditions.

Catalysts

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

• Rapid7's heavy reliance on its traditional vulnerability management offering exposes the company to commoditization risk as major enterprise customers consolidate software vendors and cloud platforms embed native security solutions, which can result in declining relevance, stagnant or negative revenue growth, and increased customer churn over the long-term.
  
• The rapid acceleration of artificial intelligence and automation in cybersecurity disproportionately benefits larger platform providers with greater R&D budgets, potentially eroding Rapid7's competitive advantage and market share, which could further slow ARR growth and compress gross margins.
  
• Growing complexity and stricter regulatory requirements for data residency and security-intensified by rising geopolitical tensions-may drive compliance costs higher for Rapid7, constraining its international expansion and directly pressuring net margins well into the future.
  
• Rapid7's slower-than-expected upgrade cycle for existing mid-market customers, coupled with prolonged deal cycles and heightened competition, points to a structural limitation in cross-selling newer cloud and XDR solutions, indicating future ARR and revenue growth rates may remain well below industry averages for an extended period.
  
• Increased integration of security tools offered directly by cloud hyperscalers, coupled with industry-wide adoption of broad platform security approaches such as zero trust, will further reduce demand for Rapid7's point solutions and specialized offerings, jeopardizing both future revenue potential and the company's ability to sustain operating leverage.

Rapid7 Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Rapid7 compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Rapid7's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 3.3% in 3 years time.
• The bearish analysts expect earnings to reach $30.6 million (and earnings per share of $0.0) by about July 2028, up from $26.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 58.0x on those 2028 earnings, up 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's Detection and Response business continues to demonstrate persistent mid-teens annual recurring revenue growth, supported by strong demand for managed offerings, growing customer adoption, and new capabilities such as AI-powered SIEM; these factors suggest a resilient revenue growth engine that could offset macroeconomic softness and support higher future earnings.
  
• The company's focus on upgrading its substantial legacy vulnerability management customer base to an integrated exposure management platform, combined with investments in packaging, pricing, and partner enablement, positions Rapid7 to increase retention, cross-sell opportunities, and drive expanded average revenue per customer.
  
• Strategic investments in global operations, especially the opening of an innovation and SOC center in India, are expected to improve operational efficiency, reduce costs, and expand profitability, which may result in margin expansion and improved free cash flow over time.
  
• International revenue is growing at a much faster pace than in the core U.S. market, representing 25% of total revenue with 10% year-over-year growth, exposing Rapid7 to faster-growing regions and offering a hedge against domestic market sluggishness, which can bolster aggregate revenue growth.
  
• Ongoing innovation in unified security platforms, investments in automation and AI, and the ability to offer solutions tailored to both mid-market and large enterprise customers position Rapid7 to capitalize on secular cybersecurity growth trends such as increasing attack surface, heightened regulation, and the global talent shortage-supporting both long-term revenue and profitability.

Valuation

• The assumed bearish price target for Rapid7 is $19.69, which represents two standard deviations below the consensus price target of $30.9. This valuation is based on what can be assumed as the expectations of Rapid7's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $924.2 million, earnings will come to $30.6 million, and it would be trading on a PE ratio of 58.0x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $22.59, the bearish analyst price target of $19.69 is 14.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.