This Stock Boasts Top Tech Firms As Clients

DevOps software company JFrog (NASDAQ:FROG) has been rising rapidly in the days following its Q4 and full-year 2023 earnings report. With investors piling into the stock on better-than-expected performance, we evaluate whether JFrog is still a buy or if share prices are too high for new shareholders to find a good entry point.

JFrog operates what it describes as a software supply chain platform, a tool that allows users to update and maintain applications across a wide range of different operating environments.

JFrog’s technology creates a single platform from which developers, security specialists, data specialists and others can work on applications in practically any major software ecosystem, thereby simplifying DevOps, increasing efficiency and facilitating collaboration for teams of software professionals.

Revenues Are Moving in the Right Direction

At the moment, JFrog shares trade at about 13x sales. To justify this multiple, the company must rapidly grow its top line. Fortunately, revenue growth trends have been overwhelmingly positive. The company has posted progressively higher revenues in every quarter since its 2020 IPO, and year-over-year growth has never yet fallen below 23.5%.

While the growth rate will naturally slow as the company matures, JFrog clearly has a strong history of increasing sales and, for the foreseeable future, this trend appears set to continue. In the coming year, analysts expect revenue growth of 22.5%.

Recent Earnings Report Beats Expectations

In addition to a favorable history of growing revenues, JFrog is also coming off a very positive earnings report. For the full year of 2023, revenues rose 25% to $349.9 million. Cloud computing revenues grew at an even faster pace, rising by 50% for the year.

Although the company is not yet profitable, its net loss per share shrank over the course of last year. In Q4, it reported a GAAP net loss of $0.11 per share. For comparison, this was less than half the loss of $0.23 per share JFrog posted in Q4 of 2022.

For the full year, net loss per share was $0.59, compared to $0.91 in 2022. Though the company still lost about $61.3 million in 2023, the trend is in the direction of eventual profitability.

On an adjusted basis, the company’s reported earnings look even more favorable. In 2022, management announced non-GAAP net income of just $3.7 million. For 2023, this number skyrocketed to $56.1 million. This translated to non-GAAP earnings of $0.54 per share, up from just $0.04 per share the previous year.

This combination of positive factors resulted in significant gains for FROG shares. Due largely to revenue growth that beat Wall Street expectations, the stock rose by nearly 30% as the market re-evaluated the firm’s prospects and value.

Tech Industry’s Biggest Names Use JFrog

Another bright spot for JFrog is the fact that the platform is used by some of the world’s largest technology companies to manage their DevOps. Amazon, Meta and Alphabet all reportedly use JFrog in their operations.

The company also continues to add new high-value customers at a rapid pace. As of the end of 2023, JFrog counted 37 customers generating annualized recurring revenues (ARR) of $1 million or more. This was nearly double the total at the end of 2022.

This focus on enterprise companies and technology giants could serve JFrog very well and give it a moat in what is otherwise a highly competitive software industry. This is especially true given the fairly small size of JFrog’s customer base.

With only about 7,400 unique customers, focusing on acquiring large companies that generate higher ARRs could support the revenue growth JFrog needs at this stage of its business.

Lack of Profitability Concerning?

The company’s lack of GAAP profitability and elevated valuation of $4.5 billion with just $350 million of trailing 12 months sales poses concerns. Clearly, investors are pricing in significant future growth and continued progress toward eventual profits. The question, though, is just how long it will take JFrog to actually turn a profit.

A further concern for investors could be the stock’s high levels of volatility. While the recent surge in prices was justified by a better-than-expected 2023 earnings report, the stock has experienced price swings of 5% or more nearly a dozen times over the last year.

This volatility has the potential to create an attractive opportunity down the line, but also makes FROG shares somewhat challenging to hold for skittish investors.

Why Did JFrog Stock Go Up?

JFrog stock went up following an earnings report that signaled fast revenue growth and a move toward profitability.

Even though the company isn’t generating net income on a GAAP basis yet, the fact that its losses are shrinking as revenue growth continues apace suggests that it’s a matter of when, not if, the company will eventually be able to generate reliable profits.

Further strengthening the argument for JFrog is how it is steadily building an effective moat by targeting dominant technology companies as customers. With Facebook, Google, Amazon and other tech giants in its customer base, JFrog likely isn’t going anywhere in the near future.

Finally, Wall Street’s smart money increasingly seems to be lining up behind JFrog. Institutional ownership of the company stands at over 57%, and selling has only outpaced buying in one quarter since 2020.

Following upgrades by analysts, the stock even appears to still have some upside left in it after the most recent earnings report. The median target price for FROG shares is now $48 per share, representing an 8.3% increase from the current price level. The stock holds a strong consensus Buy rating with 11 of the 15 analysts considering it as such.

Overall, JFrog’s potential and performance appear to justify its seemingly high price tag, making the stock a decent buy for long-term growth investors with a moderately high level of risk tolerance. Though investors should be aware of the stock’s historically high volatility, JFrog certainly seems to be a stock that has strong potential to perform well over the long run.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.