Investors Don't See Light At End Of Rapid7, Inc.'s (NASDAQ:RPD) Tunnel

With a price-to-sales (or "P/S") ratio of 1.8x Rapid7, Inc. (NASDAQ:RPD) may be sending very bullish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios greater than 5.4x and even P/S higher than 11x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Rapid7

What Does Rapid7's Recent Performance Look Like?

Rapid7 could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Rapid7 will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Rapid7's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.2%. This was backed up an excellent period prior to see revenue up by 48% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 4.1% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader industry.

With this information, we can see why Rapid7 is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Rapid7's P/S

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Rapid7 maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Rapid7 (1 is concerning!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.