Rapid7: IPO Lockup Expiration May Present Shorting Opportunity

January 13, 2016 concludes the 180-day lockup period on Rapid7 Inc. (NASDAQ: RPD). We previewed this event on our IPO Insights platform.

When the lockup period ends for Rapid7, its pre-IPO shareholders, directors and executives will have the chance to sell their 31.6 million shares.

The potential for a sudden increase in stock available in the open market may cause a significant decrease in the price of Rapid7 shares, opening a shorting opportunity for aggressive investors.

Rapid7 Inc. (NASDAQ: RPD) - Sell or Short Recommendation - $13.65 PT

Business Summary: Provider of Data and Systems Security Solutions such as Predictive Analytics Software.

Rapid7 offers analytic software and other data security solutions that use real-time data collection and analysis to detect and prevent threats and system compromises. Its real-time data processing capabilities are included in products such as Metasploit, a penetration testing system; Appspider, which offers web-based scanning for applications; Nexpose, which offers vulnerability management of attack threats; and UserInsight, which pinpoints and analyzes security breach incidents. In addition, Rapid7 offers training and certification, deployment, penetration testing, and strategic services to its clients. Rapid7 serves the energy, education, healthcare, retail, government and financial services industries.

The company's solutions portfolio offers threat exposure management, incident detection and response, security advisory services, and compliance.

In mid-December, the company announced that it had obtained $30 million in equity funding for expansion. This new round of funds brings total funding to day to $90 million since its founding in 2000. Investors include Technology Crossover Ventures and Bain Capital.

The company noted in its announcement that is focused on seizing opportunities developing in the industry of cyber security in addition to promoting its solutions to new clients. The company's CEO, Corey Thomas pointed out that cybercrime has become its own economy, and global companies are increasingly vulnerable to data breaches.

Rapid7 has over 3,000 business clients worldwide, ranging from SMEs to public companies and large enterprises.

This latest equity investment is expected to allow the company to focus on two key initiatives: development and expansion of its products that detect and investigate security compromises, and services that give clients better capabilities to manage their security programs.

Solid Q3 Financial Highlights

For the third quarter ended September 30, Rapid7 announced the following financial highlights:

• Revenue grew to $28.3 million for an increase of 39% year-over-year
• Recurring revenue represented 62% of total revenue coming from subscription-based income derived from content subscriptions, cloud-based subscriptions, maintenance and support, and managed services.
• The company realized positive cash flow of $2.3 million versus $0.9 million for the same quarter last year.
• GAAP loss from operations was $10.5 million and non-GAAP loss from operations was 7.8 million.

Cybersecurity Competition: Norton, Symantec, IBM, Hewlett Packard, McAfee and Qualys

As hacking and cyber crimes grow in frequency and size, cyber security has become a growth industry. It evolves as quickly as cyber criminals find new methods of breaching security systems. Competition comes from large, established enterprises as well as emerging providers such as Norton, Symantec (NASDAQ: SYMC), IBM (NYSE: IBM), Hewlett Packard (NYSE: HPE), McAfee, Qualys (NASDAQ: QLYS), Tenable Network Security, and Kaspersky Labs.

Early Market Performance: Solid Start, Above Initial Range

Rapid7 priced its IPO at $16 per share, well above its expected price range of $13 to $15. The stock opened on the first day of trading at $26.75 and closed at $25.28, for an increase of 58 percent. Since then the stock reached a high of $25.01 on September 21, but it has moved down to within its initial range, currently priced at $14.40.

(Nasdaq.com)

Conclusion: Sell or Short RPD Prior to Its IPO Lockup Expiration

On January 13th two firms, including Bain Capital, and over twelve individuals will have a first chance to sell ~31 million previously restricted shares.

We suggest selling ahead of the event to take full advantage of likely price declines, spurred by an impending oversupply of shares available for public sale. RPD has grown, and insiders could be ready to take initial profits.

Our firm's research has shown abnormal negative returns of 4.2% in the two weeks surrounding many lockup expirations, particularly for tech firms with strong backing, such as RPD. (In addition, RPD's powerful underwriters included leads Barclays Capital and Morgan Stanley; along with Cowen & Co., Pacific Crest Securities, Raymond James & Associates, and William Blair & Co.)