This Tech Stock Looks Interesting
Some people like tech stocks because of their ability to provide short-term capital gains. And they seem to have a point; the technology sector is filled with volatile tickers, and it’s not unusual to see a tech stock making a double-digit surge in a single day.
However, it’s worth noting that these stocks can swing in both directions. While everyone wants to bet on the next soaring ticker, they might not always end up with one. For risk-averse investors, it’s important to check that the tech stock they’re considering is backed by solid fundamentals, not just pure hype.
And that’s why today I want to talk to you about Rapid7 Inc (NASDAQ:RPD).
Compared to the mega-cap tech giants, Rapid7 may not sound like a familiar name. But the company comes from one of the fastest-growing areas in tech: cybersecurity.
Just take a look at Rapid7’s latest earnings report and you’ll see why RPD stock deserves investor attention. In the second quarter of 2019, Rapid7 generated $79.0 million of revenue, a 35% year-over-year increase. (Source: “Rapid7 Announces Second Quarter 2019 Financial Results,” Rapid7 Inc, August 1, 2019.)
Realizing the critical nature of data in this day and age, organizations around the world have been spending increasing amounts of money on cybersecurity products and services.
And Rapid7 has done a great job capitalizing on the cybersecurity boom. From 2014 to 2018, the company’s revenue increased at a compound annual growth rate (CAGR) of 35%. (Source: “Company Overview,” Rapid7 Inc, August 1, 2019.)
Of course, in the tech sector, things can change very quickly, and you can’t just draw a trend line and expect things to continue in that direction indefinitely.
But here’s the neat part: Rapid7 is not just making one-time sales. Instead, when customers sign up to use the company’s cybersecurity products and services, they tend to stay with the company for a long time.
Rapid7 Inc Is Running a Recurring Business
In the second quarter of 2019, recurring revenue accounted for 87% of Rapid7’s total revenue. Moreover, the amount of recurring revenue generated during the quarter represented a 50% increase year-over-year. (Source: Ibid.)
As mentioned earlier, Rapid7’s top-line number has been growing at a rapid pace in recent years. But since we’re talking about customer loyalty, it’s worthwhile to check how the company’s recurring revenue has changed.
The good news is, Rapid7 Inc reports something called annualized recurring revenue, which it considers to be the best indicator of the growth in its business. From 2015 to 2018, the company’s annualized recurring revenue increased at a CAGR of 41%.
Better yet, thanks to upsells and cross-sells, the company managed to make more money from each customer.
Consider this: in the first quarter of 2017, Rapid7’s annualized recurring revenue per customer was around $20,200. By the second quarter of 2019, the company was earning $34,500 in annualized recurring revenue from the average customer. That’s an increase of 70.8%.
Keep in mind that the last time Rapid7 reported earnings, its customer base was above the 8,000 mark.
Rapid7 Inc (NASDAQ:RPD) Stock Chart
Chart courtesy of StockCharts.com
Despite not being a big ticker—Rapid7 Inc has a market capitalization of around $2.7 billion—RPD stock has made some impressive gains this year.
If the company manages to keep growing its recurring business at a solid double-digit clip, I wouldn’t be surprised to see the rally continue for Rapid7 stock.