Rapid7 has been a very interesting stock to follow for us. That is not because of the cybersecurity company’s business fundamentals or market position. Instead, it is because it turns out RPD tends to follow the rules of the Elliott Wave principle quite closely.
We first wrote about Rapid7 in August, 2019, stating that a notable correction was likely to occur. A 52.5% crash followed over the next several months. But that plunge planted the seeds of a rally, so we turned bullish in April, 2020. A year later, by April, 2021, Rapid7 stock had already doubled. And the third time we examined RPD was almost a month and a half ago, on April 1st, 2022. We thought it was time for another notable drop. The reason for our pessimism was none other than the chart below.
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The stock’s daily chart revealed a textbook impulsive decline from $145 to $85 a share. The pattern, labeled 1-2-3-4-5, meant Rapid7 is officially in a downtrend. According to the theory, more weakness could be expected once the subsequent corrective recovery was over. With that in mind, we wrote that “the recent rally” from $85 “is unlikely to reach a new record. Instead, investors should prepare for another leg down” that “is supposed to drag Rapid7 stock to a new low below $85 a share in the months ahead.” The updated chart below shows how the situation unfolded.
It’s been less than two months and Rapid7 stock has already crashed from $111 at the time of writing to below $64. In other words, RPD is down 43% since our April 1st article. After the ones in Etsy, Match Group and NovoCure, Elliott Wave analysis put us ahead of Rapid7 ‘s sharp selloff, as well.
That being said, we don’t think the selloff is over. Despite its rapid sales growth, Rapid7 is still a barely profitable business. It is expected to only make 50 cents in EPS in 2023, putting the stock at a forward price-to-earnings ratio of 127. In other words, despite being down 56.5% from its record, Rapid7 remains extremely overvalued and therefore prone to further weakness. We’d rather watch from a safe distance.
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