A Booming Tech Company You Likely Haven’t Considered
When consumers are panic buying and stockpiling toilet paper, the stock market doesn’t seem to be an attractive place. But remember that legendary investor Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.”
Indeed, “fearful” is the prevailing sentiment at the moment. With the S&P 500 index plunging around 30% over the past month, everything seems to be dropping to the floor.
But that also means a lot of fast-growing companies are trading at much lower prices than they used to. If their business can remain solid during the coronavirus outbreak, the current sell-off might be a good opportunity for bargain hunters.
With that in mind, let’s take a look at Rapid7 Inc (NASDAQ:RPD).
Headquartered in Boston, Rapid7 is in the cybersecurity business. Because the company mainly serves enterprise customers, most people have never heard of it. And with a market cap of around $1.8 billion, Rapid7 is much smaller than tech giants like Alphabet Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN).
Still, little-known stocks can deliver big growth numbers. And Rapid7 serves as a great example. According to the company’s latest investor presentation, from 2014 to 2019, Rapid7’s revenue increased at a compound annual growth rate (CAGR) of 34%. (Source: “Company Overview,” Rapid7 Inc, February 10, 2020.)
Now, one of the main concerns about tech stocks is that, because the industry is fast-changing, past success does not guarantee future results. In fact, we’ve seen plenty of instances in which booming businesses eventually started deteriorating.
The neat thing about Rapid7 stock is that the company is not making one-time sales. Instead, when organizations sign up to use Rapid7 Inc’s cybersecurity solutions, they tend to stay with the company—meaning they’ll be paying the company repeatedly.
In other words, Rapid7 can run a recurring business, which is one of the best attributes for a tech company. In 2019, recurring revenue accounted for 87% of the company’s total revenue.
The best part is, Rapid7’s recurring revenue has been growing at a faster pace than its total revenue. As the chart below shows, from 2015 to 2019, the company’s annualized recurring revenue increased at a CAGR of 39%.
Rapid7 Inc Annualized Recurring Revenue ($Millions)
One of the reasons behind the company’s strong growth rates is that more businesses started to use its solutions. In the fourth quarter of 2019, Rapid7 had 9,022 customers. That was up 16% from the same quarter a year earlier. (Source: “Rapid7 Announces Fourth Quarter and Full-Year 2019 Financial Results,” Rapid7 Inc, February 10, 2020.)
Moreover, the company is making more money from each customer. In the fourth quarter of 2019, the annualized recurring revenue per Rapid7 customer was $37,500, up 16% year-over-year.
And here’s a number that really makes Rapid7 stand out compared to other tech stocks: 108%. That’s the company’s renewal rate.
In the tech world, many companies are trying to bump up their customer retention rate in order to have a recurring business. Yet despite being one of the lessor-known names, Rapid7 Inc has a renewal rate that’s over 100%.
How is that possible?
Well, the company calculates its renewal rate by dividing the dollar value of renewed customer agreements in a trailing 12-month period by the dollar value of the corresponding customer agreements.
Thanks to upsells and cross-sells of additional products, the dollar value of renewed customer agreements was higher than before, thus resulting in a renewal rate above 100%.
Another thing that makes RPD stock special is the company’s bottom line. If you’ve been following tech stocks, you’d know that the fast-growing businesses aren’t always profitable. In fact, there are companies with very impressive top-line growth rates that still incur losses year after year.
Not Rapid7, though. In 2018, the company had an adjusted net loss of $0.41 per share. In 2019, it earned adjusted net income of $0.09 per share.
And the company is not standing still.
In 2020, management expects Rapid7 Inc to generate annualized recurring revenue of $420.0 to $426.8 million, which would represent year-over-year growth of 24% to 26%.
For the same year, the company is projected to earn adjusted net income of $0.11 to $0.18 per share, which would mark a sizable improvement from the $0.09 per share it earned in 2019.
Of course, given that a recession seems to be looming, a lot of tech companies probably won’t hit their guidance this year.
But here’s the thing: as more companies start letting employees work from home due to the coronavirus outbreak, a lot of workers will be accessing their companies’ data through the Internet.
As a result, cybersecurity solutions will be in high demand. Sure, Rapid7 stock has tumbled during the market downturn, but the impact on this cybersecurity company’s business might not be as severe as the bears think.
At the end of the day, it’s hard to say how long the sell-off will last in the U.S. stock market.
But if Rapid7 Inc can keep growing its business, investors who picked up RPD stock on the cheap will likely be rewarded in the long run.