It takes time and energy to research stocks. Additional expenditure is required to write, with attention to objectives such as not being repetitive (and to try and format with new software). Thus, having read up on accolades earned by a cyber security firm, read through its filings, and reviewed its most recent conference call transcript, there seems to be little incentive to produce a post describing a trade and its rationale, despite a 12 page MS Word file on it.
Anyhow, before going over what I have on Rapid7, let me say that it is easy to harbor some resentment toward local firms. You can see how management could be doing better, you can review other executive biographies and perhaps have insight into why those people occupy their hierarchical spaces and know what might easily be improved. This view does not allow for the fact that worthwhile employees can be hard to find, and that, no matter how over-rated some aspects of the corporation may be, it is a functional business within one of the most viable contemporary industries.
Let’s say there is no need to provide evidence that security against malicious computer problems is really needed everywhere, and will be for the foreseeable future. Anyone following stocks knows that shares in such companies tend to be expensive. Consequently, my secondary focus here is not necessarily on profitability, cash flows, or associated ratios, but upon the firm’s financial condition when considering the potential for future issuance or stock, or any imminent fiscal concerns.
Rapid 7 has continuously been losing money. However, its product sales have been increasing the company’s revenues and it has been using those funds to invest or spend on research and development and also new sales persons. The result? Despite an increasing share count, pursuant to two offerings of stock that brought the company no money this year, the loss, in EPS terms, has gone from -$.025 to -$0.36 since last year.
Here is a graphic of aspirations contained in the firm’s own recent investor presentation:
Perhaps as mitigation it has federal and state Net Operating Loss (NOL) carryforwards, which can be attractive to an acquirer because of the possibility of tax savings. Given the need for a viable products in this industry, this is not something to overlook. It is not something to bank on either.
Also, after a tax cut specifically aimed at helping corporations, Rapid7 might not do so well. Per its filings:
“Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected.”
Anyhow, before going over what I have on Rapid7, let me say that it is easy to harbor some resentment toward local firms. You can see how management could be doing better, you can review other executive biographies and perhaps have insight into why those people occupy their hierarchical spaces and know what might easily be improved. This view does not allow for the fact that worthwhile employees can be hard to find, and that, no matter how over-rated some aspects of the corporation may be, it is a functional business within one of the most viable contemporary industries.
Let’s say there is no need to provide evidence that security against malicious computer problems is really needed everywhere, and will be for the foreseeable future. Anyone following stocks knows that shares in such companies tend to be expensive. Consequently, my secondary focus here is not necessarily on profitability, cash flows, or associated ratios, but upon the firm’s financial condition when considering the potential for future issuance or stock, or any imminent fiscal concerns.
Rapid 7 has continuously been losing money. However, its product sales have been increasing the company’s revenues and it has been using those funds to invest or spend on research and development and also new sales persons. The result? Despite an increasing share count, pursuant to two offerings of stock that brought the company no money this year, the loss, in EPS terms, has gone from -$.025 to -$0.36 since last year.
Here is a graphic of aspirations contained in the firm’s own recent investor presentation:
Perhaps as mitigation it has federal and state Net Operating Loss (NOL) carryforwards, which can be attractive to an acquirer because of the possibility of tax savings. Given the need for a viable products in this industry, this is not something to overlook. It is not something to bank on either.
Also, after a tax cut specifically aimed at helping corporations, Rapid7 might not do so well. Per its filings:
“Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected.”
Here is the overall guidance given on the Q1 2018 Conference Call:
“we are raising our guidance for growth in both ARR and revenue for 2018 maintaining our guidance for 2018 operating loss and reiterating our goal of achieving profitability in 2019.”
That brings me to two other considerations. (1) if you are using financial metrics to assess the stock, management is supplying you with Annualized Recurring Revenue (ARR), or the annualized value of all recurring revenue related to contracts in place at the end of the quarter. This is obviously not the same as earnings per share, cash flow measures, or even EBITDA. (2) A substantial portion of the conference call presentation pertains to explanations of accounting terms. Perspectives can differ on the topic (I am unaware of any ‘great’ investors who are accountants). For the most part, accounting problems are a reason to sell a stock; otherwise the topic might be ersatz for better things to discuss with investors.
The above qualifications in mind, guidance for ARR growth does include a larger share count than is currently reported. There could be another offering of stock. Two have already occurred this year, so some of it is out of the way.
Amid pervasive background issues pertaining to tariffs, protectionism, and international trade,
Rapid7’s international prospects seem tangible. A mid-teens percentage of activities are carried on outside the USA, particularly Europe and Asia. About 13% of expenses are incurred outside the country, primarily in the UK and EU. However changing currency valuations should not have a material impact. Here is Conference Call commentary:
“in Q1, North America comprised 85% of revenues. Rest of the world revenue increased 22% year-over-year and contributed 15% of total revenue in the first quarter. While our rest of the world revenue growth was a little slower this quarter due to large services deal recognized in Q1 2017, we did see our international bookings grow faster than overall bookings.”
Still, renewal rates from existing customers are particularly strong. Further, management sees opportunities to cross-sell into its existing base.
The company is transitioning to a subscription-based model, which can be the way to go with software, and in several other industries.
What gets my attention, though, is that the company has recently been recognized for its products. It has been awarded the Best at “Vulnerability,” and a Finalist/runner up at Security Information and Event Management “SIEM” and also “Threat Detection.”
In Europe, an important market, it has honorable mention for “Deception Technology,” and “Vulnerability Management Solution.”
As long as there is no big disappointment, the stock should probably maintain its price or drift higher. Technically, one might look for it to retest $27.70, though it is not guaranteed:
One of my trades here is to buy the November $20 call, which has almost no time value in its price. It is similar to buying 100 shares of stock, but only paying about $1,018. At the same time, I have sold the $30 call option that expires this month, in two weeks, for $70. If the stock finishes the month above $30, then the trade is worth about $40 to me after commissions and book keeping fees but before tax. Since earnings should be announced next month, sale of an August $30 should fetch a higher price–especially if interest rates also go up.
Because the company is in such an important industry, has high renewal rates with management clear about cross-selling opportunities, and has done well at a recent awards ceremony, there is potential for the share price. There are other considerations too, such as using management’s metric and buying into a presentation on accounting standards. Thus, the opportunity to collect a return as time passes, while only seeking modest upside in the near-term, could be worth while.