Developer tool maker JFrog (NASDAQ:FROG) has joined the ranks of tech unicorns going public in 2020. On Sept. 16, FROG stock started trading at an opening price of $71.27 and hit an all-time high of $83.50 on Sept. 23.
Now, it is hovering around $85. Its market capitalization (cap) stands at $6.7. billion.
The gains are impressive, especially when considering the company had priced the IPO at $44.
As a study led by Drexel University finance professor Michelle Lowry points out, “The pricing of an IPO is a complex process.” The authors highlight that it is especially difficult-to-value “young, small, and technology companies” as they go public.
Despite the volatility in broader markets in September, FROG stock has attracted positive momentum in recent weeks. Today, we’ll look at if the newcomer should belong in a long-term portfolio.
A Closer Look at FROG Stock
Israel-based JFrog, founded in 2008, describes its mission as transforming “the way enterprises manage and release software updates.” The company develops tools to streamline the coding process and automate software updates.
According to a recent SEC filing, “As of June 30, 2020, approximately 5,800 organizations, including all of the top 10 technology organizations, 8 of the top 10 financial services organizations, 9 of the top 10 retail organizations, 8 of the top 10 healthcare organizations, and 7 of the top 9 telecommunications organizations in the Fortune 500 have adopted JFrog.”
The group now has multiple locations worldwide and the U.S. headquarters is in Sunnyvale, Calif. Put another way, JFrog has carved itself an important niche and built a strong base. It has generated revenue of $46.1 million and $69.3 million for the six months ended June 30, 2019 and 2020, respectively, representing a growth rate of 50% in a year. Its free cash flow was -$0.7 million and $4.4 million for the six months ended June 30, 2019 and 2020, respectively.
However, the company is not yet profitable. Net loss was $2.1 million and $0.4 million for the six months ended June 30, 2019 and 2020, respectively. Yet, most of the revenue is subscription based and the Street favors such businesses. It means more predictable revenue and cash flow. Thus the company may become profitable sooner than later.
What to Expect From FROG Stock
Many analysts concur JFrog’s platform has a significant role to play between the development and deployment of a given software. Increased digitalization means more software now lives in the cloud than before.
While many users as well as employees access these programs from multiple devices, companies cannot afford a world where there are disruptions to software usage. Therefore, demand for JFrog’s platform will possibly increase a lot more in the coming years.
However, a bright future may not necessarily mean the price is right for investing at this point. For example, FROG stock’s P/S ratio currently stands at 46.91, which means investors are willing to pay $46.92 for $1 in sales. That is a rich valuation, even for a growth company like JFrog.
Some investors may argue that it is much less than the P/S number of 185.43 for Snowflake (NYSE:SNOW), which has also just gone public. On a side note, we find, SNOW stock’s current valuation to be high too.
In general, there are many unknowns to IPO investing. CNBC host Jim Cramer believes investors should consider buying into the declines in JFog share price. We agree with his analysis fully. October may bring more volatility into the markets, resulting in profit-taking in many hot names of today.
We’d wait for such an opportunity to buy FROG stock. A decline toward $65 would improve the margin of safety. Meanwhile, we’d encourage potential investors to analyze financials and forward-looking statements as they are released by JFrog.
The Bottom Line
Code management company JFrog has built a business that has the momentum to support its share price in the new decade However, broader markets, especially tech shares, are choppy now. Short-term caution is the name of the game
Therefore, potential investors in FROG stock may want to stay on the sidelines until the share price settles amid the excitement of these early days. Long-term investors may consider buying the dips, especially if the price goes below $70 and toward the $65-level.
Those investors who already own the shares may consider taking some money off the table or hedging their positions. Such a hedge would limit their downside risk in the event the market drops or if the bullish thesis on FROG stock ends up being wrong.
As for hedging strategies, covered calls or put spreads with Nov. 20 expiration dates could be appropriate. Straight purchases of put options are likely to be expensive due to heightened volatility in tech shares. Investors who choose this route can reevaluate their long positions around the expiry of options.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.