Investors in JFrog (FROG) face an interesting decision. After rocketing higher following its initial public offering (IPO), FROG stock has settled into a range. Despite beating both top and bottom-line expectations in its latest earnings report, the bulls don’t seem to have much conviction. JFrog stock surged nearly 10% the morning after its earnings were released, but it quickly gave up nearly all of those gains.
Some of this may be due to a case of elevated expectations. The $42.7 million in revenue for the quarter reflected a 39% year-over-year gain. However, in the software-as-a-service (SaaS) space, it’s possible that investors were expecting more.
It could also be that investors are eyeing the upcoming end of the company’s lock-up period. FROG went public in September, and at that time, the lockup was set to expire on March 15, 2021. The company did release 25% of the shares in November, but the remainder will expire in just about a month.
Typically, the end of a lock-up period is a dilutive time for a stock. That’s because this is the first chance early investors (usually institutional investors with large positions) have the opportunity to offload their shares.
Add in the oft-expressed opinion that JFrog has been overvalued since it went public at a price of $44. That’s a lot of potentially bad news for investors to consider.
JFrog is Future-Focused
The bullish case for JFrog centers around its position in the DevOps universe. DevOps is a development strategy that bridges the gap between software development and IT operations. In JFrog’s case, it delivers what is referred to as “liquid software.” In layman’s terms, JFrog’s Artifactory Enterprise Universal Repository Manager ensures that software updates are performed in real-time without disruption.
Since virtually every company needs to ensure that software updates are done quickly and without incident, JFrog has a large addressable market. However, the company does face hefty competition.
For example, there is some talk in the industry that GitHub may be able to create a platform that would rival the functionality of JFrog’s. As GitHub’s parent company, Microsoft (MSFT), boasts an ample supply of cash, this is a fair concern.
Sound Fundamentals
Although FROG is still considered a growth stock, the company is already showing positive free cash flow (FCF) and has posted positive earnings per share in both of the quarters since going public.
Additionally, the company continues to report a revenue retention rate that is the envy of many companies. Not only does its over 100% retention rate indicate that it’s not losing customers, it also shows that customers are spending more every year. This was the case in the company’s most recent earnings report, when it noted that 26% of its revenue came from its Enterprise + subscription. That was twice the adoption rate on a year-over-year basis.
Analysts Weigh In
The analyst community gives FROG a Moderate Buy consensus rating, as the stock has received 3 Buy ratings and 2 Hold ratings in the last three months. Given its average analyst price target of $81.60, shares could rise 18% in the year ahead (See JFrog stock analysis on TipRanks)
Don’t Fight the Trend on FROG Stock
A technical analysis of FROG stock doesn’t show much to get excited about, and investors don’t seem to be all that impressed by the company’s sound fundamentals. Therefore, institutional and retail investors alike are waiting for the end of the lock-up period to place their bets.
However, with analysts holding a bullish outlook for the stock, long-term investors may find that now is a good time to start a small position, with the opportunity to add to it when the lock-up period ends.
Disclosure: On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
