JFrog Ltd Stock: A First Assessment (NASDAQ:FROG)

We are born princes and the civilizing process makes us frogs.” – Eric Berne

Another day, another piece on a promising software application concern whose stock had been hit hard by the downturn in the market in recent months. So, is this ‘Busted IPO’ finally ready to jump off the lily pad or continue to provide mainly warts to investors? We attempt to answer that question via the analysis below.

Company Overview:

JFrog Ltd. (FROG) is based just outside of San Francisco. This tech concern develops and distributes DevOps platforms in the United States. The company’s products allow teams and organizations to store, update, and manage their software packages at any scale. These offerings allow development teams to easily develop and deploy new software releases. JFrog offers a multi-tiered subscription structure which utilizes free trials and open source offerings. At the end of FY2021, the company had 6,650 paying customers, up 10% from the end of FY2020. More importantly, customers with at least $100,000 in ARR rose to 537 versus 352 at the end of 2020.

The shares currently trade around $25.00 a piece and sport an approximate market capitalization of just north of $2.3 billion.

Fourth Quarter Results:

On February 10, the company released fourth quarter results. JFrog had a non-GAAP loss of a penny a share, slightly below expectations. Revenues rose nearly 40% from the same period a year ago to a tad over $59 million, a bit above the consensus.

Cloud revenue growth was particularly strong during the quarter coming in at $14.8 million. That is up over 50% from the same period a year ago. Cloud revenues now account for a quarter of the company’s sales, up from 23% previously. Both marketing and R&D expenses ticked up as a percentage of overall sales from 4Q2020. For the full year, JFrog delivered $206.7 million in overall revenues, up 37% from FY2020.

Analyst Commentary & Balance Sheet:

The analyst community is quite mixed on FROG at the moment. Over the past month, Bank of America ($34 price target) and Morgan Stanley ($40 price target) have reissued Hold ratings. Needham ($32 price target), Berenberg Bank ($50 price target), and Oppenheimer ($45 price target, down from $55 previously) have reiterated Buy ratings on the shares.

Insiders have been frequent sellers of the shares since the company came public. The latest transactions occurred from February 16th through February when the Chief Financial Officer and Chief Revenue Officer sold nearly $900,000 worth of stock in aggregate. Approximately one in twelve shares are currently sold short.

The company ended FY2021 with just over $420 million in cash and marketable securities on its balance sheet against negligible debt. While the company posted a GAAP operating net loss of $22.6 million, it also produced $16.6 million in free cash flow during the fourth quarter.

Verdict:

The current analyst consensus has the company breaking even in FY2022 as revenues jump by a third to nearly $275 million. In FY2023, the analyst community has a small profit projected as sales increase again some 28% to $350 million.

JFrog is aiming at a large target market. Sales growth is predicted to slow over the next couple of years from FY2021’s as the company has a bigger base to deliver against. Even with the recent decline in the stock, the shares go for over eight times forward sales (approximately seven times sales if accounting for net cash on the balance sheet) and significant profitability appears years down the road. Therefore, I am going to pass on any investment recommendation until the overall market stabilizes and/or insiders step up and start to buy the pullback in this equity. Five times forward sales net of cash seems a more compelling valuation in the current market environment.

You can’t tell by the look of a frog how far they’ll jump.” – Paul Doiron

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum