JFrog (NASDAQ: FROG) is a US-Israeli supplier of a software program provide chain growth platform that permits organizations to handle end-to-end lifecycle of software program growth, from growth, to launch, and to safety.
I’ve lined FROG earlier than final 12 months in June, after I wrote about its enticing potential, regardless of ranking the inventory impartial at the moment. I felt that the upside was absolutely priced in and that traders ought to watch for a greater entry level then. For the months following my maintain ranking, FROG remained comparatively flat, reinforcing a few of my preliminary considerations. Nevertheless, these considerations dissipated faster than I had anticipated, as FROG noticed a surge beginning in November and is now up by about 41% since my final ranking. The excellent news is that given the present surroundings, I consider traders can nonetheless seize some extra upside in FROG.
I’ve upgraded FROG to purchase. My modeled 1-year goal worth of $43 tasks a 16% upside. FROG stays a beneficiary of the secular digital enterprise transformation pattern. The latest non permanent headwinds within the type of delayed enterprise cloud migration tasks might probably subside within the second half. The latest pullback to $37 gives a stable purchase alternative, in my view.
Monetary Overview
Apart from the weak GAAP profitability, FROG has first rate fundamentals, which I additionally famous in my earlier protection. Income development has normalized from over 60% to 25% over the previous 5 years. In FY 2023, FROG delivered a income of $350 million, a 25% YoY development. Web loss margin has narrowed a little bit bit to -17%, although it’s nonetheless far-off from break even. One optimistic factor in FY 2023, in my view, is the numerous working money circulate (OCF) enlargement to $74 million, greater than triple that of final 12 months. This has resulted in an honest liquidity enhance for the 12 months. FROG ended FY 2023 with over $545 million of money and short-term investments.
Catalyst
As per my earlier protection, I consider FROG will general proceed to learn from the secular enterprise digital transformation tendencies. On this protection, it’s most likely worthwhile to grasp how FROG truly has been benefiting from the pattern and the way it’s progressing to this point.
In This fall, it seems that FROG’s fundamental go-to market entry level within the enterprise digital transformation section might have been cloud migration. Cloud migration is the method of transferring on-premise enterprise information and functions to the cloud, making it a crucial half to modernizing an enterprise IT surroundings.
The motivation is kind of clear – cloud-hosted functions supply higher economics long run via simpler upkeep and higher scalabilities. Nevertheless, this additionally means migrating an usually sizable utility codebase to the cloud and securing it. Since FROG’s choices assist enterprises obtain this by streamlining the software program growth provide chain from code-development to launch, investing in FROG looks as if a smart resolution to realize such a marginal profit in a capital-intensive digital transformation mission.
Rising at 24.4% CAGR, cloud migration is projected to be an $18 billion market by itself in 2024 within the US alone. Although this isn’t a direct market alternative for FROG, its choices have been in demand as a result of improve in enterprise cloud migration actions, as commented by the administration in This fall earnings name:
Third, I wish to handle development within the enterprise adoption of the JFrog platform. The transfer towards a unified common platform for the enterprise will not be solely a expertise or instrument initiative but in addition a change we see in how corporations are being structured to streamline digital deliveries. We see roles like CIOs and CISOs turning into one and cloud migration tasks concentrating on a number of facets like tooling consolidations to realize pace and belief all through the software program circulate.
Supply: This fall earnings name.
At this level, I consider that there are two key takeaways that will spotlight near-term catalysts for FROG. To begin with, the macro problem that has delayed a number of enterprise cloud migration tasks FROG has been concerned in might probably subside, offering bookings acceleration within the second half of FY, as commented by the administration in This fall:
Slowly into the 12 months, we noticed an enchancment within the frequency of on-prem to cloud migration tasks being restarted alongside extending consumption within the second half of the 12 months as we shared in earlier calls.
Supply: This fall earnings name.
Second of all, I consider the restart of those delayed cloud migration tasks will proceed to emphasise the significance of IT value optimization, which is achieved primarily via vendor consolidation. FROG is well-positioned to reap the profit right here, due to the character of its options that handle the entire software program growth provide chain.
Threat
For my part, FROG’s market share seize within the enterprise section, which has been fairly important as of late, might probably elevate income focus threat. Virtually half of FROG’s income in FY 2023 got here from enterprise subscriptions, in comparison with simply 38% final 12 months. As per its 10K, this has resulted within the high 10 clients making up as a lot as 7% of FROG’s income as of FY 2023. Given the potential acceleration of main enterprise cloud transformation tasks within the second half, I consider this determine might probably improve additional by the tip of FY 2024.
Valuation / Pricing
To estimate the goal worth for FROG in FY 2024, I assume the next bull vs bear situation in a 5-year income projection:
Bull situation (50%) – FROG to complete FY 2024 with a income of $428 million, a 22% YoY development, according to the corporate’s steering. On this situation, I count on most cloud migration tasks to restart within the second half, giving FROG additional income visibility into the FY. P/S to broaden to 12x, the extent the place it just lately noticed a YTD excessive.
Bear situation (50%) – FROG to complete FY 2024 with a income of $420 million, a 20% YoY development, which is $8 million decrease than the corporate’s low-end income steering. I count on FROG to see continued headwinds and surprising churn. On this situation, the market will attain negatively, leading to sideways worth motion for the inventory.
Consolidating all the knowledge above into my mannequin, I arrived at an FY 2024 weighted goal worth of ~$43 per share. This represents nearly 16% upside from the present worth of $37. I improve FROG to purchase.
Regardless of my conservative projection, FROG nonetheless delivers a stable upside, for my part. Nonetheless, the upside right here additionally assumes FROG rebounding again to the place it was earlier than the pullback, which was proper round $43, my goal worth. As such, I consider FROG could also be oversold at the moment.
Conclusion
As I highlighted in my earlier protection, FROG is a compelling alternative. It is going to proceed to learn from the secular enterprise digital transformation pattern, additional fueled by the shift in direction of vendor consolidation technique to optimize prices. Although FROG has seen a little bit of non permanent headwinds within the type of delayed cloud migration tasks at its potential purchasers, the administration has seen indicators of potential restart within the second half. The latest pullback gives a superb shopping for alternative. My 1-year worth goal of $43 signifies that FROG is eyeing nearly 16% upside at 12 months’s finish.