Every investor on earth makes bad calls sometimes. But you want to avoid the really big losses like the plague. So take a moment to sympathize with the long term shareholders of Rapid7, Inc. (NASDAQ:RPD), who have seen the share price tank a massive 70% over a three year period. That'd be enough to cause even the strongest minds some disquiet. And the ride hasn't got any smoother in recent times over the last year, with the price 25% lower in that time.

Since Rapid7 has shed US$82m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

Rapid7 isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. When a company doesn't make profits, we'd generally hope to see good revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.

In the last three years, Rapid7 saw its revenue grow by 18% per year, compound. That's a fairly respectable growth rate. So it's hard to believe the share price decline of 19% per year is due to the revenue. It could be that the losses were much larger than expected. This is exactly why investors need to diversify - even when a loss making company grows revenue, it can fail to deliver for shareholders.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. So it makes a lot of sense to check out what analysts think Rapid7 will earn in the future (free profit forecasts).

A Different Perspective

Rapid7 shareholders are down 25% for the year, but the market itself is up 23%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 5% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It's always interesting to track share price performance over the longer term. But to understand Rapid7 better, we need to consider many other factors. For example, we've discovered 3 warning signs for Rapid7 (1 is significant!) that you should be aware of before investing here.

Of course Rapid7 may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.