What happened
Rapid7 (RPD -0.32%) returned 20.2% in July after it announced better-than-expected preliminary financial results and the acquisition of IntSights, a cyber threat intelligence company. This acquisition enhanced the company's ability to detect threats to its customers' cloud networks, improving its position in a competitive cybersecurity market.
RPD Total Return Level data by YCharts
So what
Rapid7 was already trending upwards in the first half of July. Cybersecurity stocks were trending upward in general, and Rapid7 built upon that industry momentum by launching a new cloud-focused platform. The addition of IntSights on July 19 further augments the company's offering. It can now monitor threats both inside and outside of a customer's network, allowing businesses to proactively take measures to protect sensitive data.
Rapid7's revenue accelerated in the second quarter, reaching 29% year-over-year growth, even before the acquisition of IntSight closes. That was above the high end of guidance provided by management and better than analysts had forecast.
Image source: Getty Images
Now what
Rapid7 is in a great spot moving forward. It's expanding market share, and the cybersecurity industry is bound to grow substantially in the upcoming years. Digital transformation will continue to put pressure on every type of business to protect sensitive data. We've seen several high-profile instances of hacking and ransomware attacks, showcasing the importance of threat identification and prevention.
It's fair to expect Rapid7 to continue growing, but the stock comes with some risks. High valuation is part of this risk. Based on annualized revenue from the most recent quarter plus IntSight's approximate annual revenue, Rapid7 currently carries a 12.5 price-to-sales ratio. It also trades at a nearly 58 price-to-book ratio. The company isn't profitable, but it looks set to break even later this year. Still, its forward price-to-earnings ratio is more than 400 based on forecast earnings for 2022.
You have to pay a massive premium to get access to Rapid7's upside potential. The stock could drop substantially if there's a market correction or if competition causes the company's sales growth rate to deteriorate. Don't be afraid to hold onto this stock if you love the company and are in for the long haul. Just don't be shocked by a bumpy ride along the way.