Cyber security solutions developer Rapid7, Inc. (RPD - Get Rating) has gained 111.6% over the past year, driven by the rising awareness of cyberattacks amid mass digitization. The worst cyberattack in United States history, which affected several Fortune 500 companies and government agencies, came to light in December last year. This, coupled with  structural changes to develop hybrid operational structures, has led companies to invest heavily in cybersecurity of late.

However, the ongoing market rotation from growth to value stocks has negatively impacted RPD. Moreover, analysts expect the Fed to cut back on its extensive corporate debt purchases in the near term, as evidenced by  rising Treasury yields.

So, as a relatively overvalued and debt-oriented stock, RPD has declined 11.8% year-to-date due to the prevailing market sentiment.

Click here to checkout our Cybersecurity Industry Report for 2021

Here’s what could shape RPD’s performance in the near term:

Trading at a Premium Valuation

In terms of non-GAAP forward p/e, RPD is currently trading at 4544x, which is significantly higher than the industry average  26.45x. The company’s forward ev/ebit and price/sales multiples of 299.49 and 8.49, respectively, are significantly higher than the respective industry averages.

Its forward price/cash flow of 155.92x is 615.8% higher than the industry average  21.78x.

Weak Profitability

RPD has a trailing-12-month net income margin of negative 24.02%, compared to an industry average of 4.07%. While the company’s trailing-12-month levered free cash flow margin of 12.96% is slightly higher than the industry average of 12.42%, its ROE, ROA and ROTC are negative.

Also,  its trailing-12-month EBITDA margin of negative 11.75% is significantly lower than the industry average of 13.6%.

Surging Debt

RPD’s trailing-12-month total debt stands at $463.94 million, which translates  to a total debt to equity ratio of 648.53%. The company’s trailing-12-month book value per share came in at negative $3.57.

While the company has a trailing-12-month levered free cash flow balance of $53.32 million, its debt/free cash flow ratio is tremendously high at 7.10x. And  with negative EBITDA, RPD’s ability to meet at least interest expenses on its debt is concerning.

Unfavorable POWR Ratings

RPD has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor equated to an optimal degree.

RPD has a D grade  for Quality and Sentiment, and C for Value. Analysts expect RPD’s earnings to remain negative in the current  quarter and reach break-even by the next quarter, in sync with the Sentiment grade. The company’s skyrocketing valuation and weak profitability are reflected in the Quality and Value grades.

Of the 24 stocks in the C-rated Software – Security industry, RPD is ranked #21. You can check out additional RPD ratings for Growth, Momentum and Stability here.

Click here to view the top-rated stocks in the Software – Security industry.

Bottom Line

RPD’s poor earnings growth potential makes it susceptible for a pullback, particularly amid the ongoing value rotation. Thus, we think RPD is best avoided now.

Click here to checkout our Cybersecurity Industry Report for 2021

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RPD shares were trading at $72.52 per share on Thursday afternoon, down $6.48 (-8.20%). Year-to-date, RPD has declined -19.57%, versus a 4.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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