Niche Software Service JFrog Is Compelling But Possibly Overvalued

Despite the far-reaching impact of the novel coronavirus, 2020 has been the year of exciting market debuts, whether via special purpose acquisition companies or through the traditional initial public offering. Enterprise software services company JFrog (NASDAQ:FROG) belongs in the latter category, impressing Wall Street immediately. From its IPO price of $44, FROG is just under $76 at time of writing.

Coding software developer work with augmented reality dashboard computer icons of scrum agile development and code fork and versioning with responsive cybersecurity
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Billed as an end-to-end services provider, JFrog’s biggest claim to fame is arguably its “liquid software” innovation. In years past, software users were often forced to download the latest versions of their applications. Today, such a notion is considered incredibly antiquated. With the advent of the Internet of Things and other digitalized innovations, users expect the latest software iterations to occur automatically and seamlessly.

Well, that’s great on the consumer end. As you can imagine, it’s a bit more of a complicated task for the development and distribution teams. The world of enterprise software development is a convoluted one, with development teams utilizing multiple platforms. Additionally, the delivery or distribution side uses different environments from the programming side, creating circumstances for errors and setbacks to occur.

Fortunately, JFrog implemented a software management platform to address this niche but critical demand. It’s a holistic service, involving programming integration management, security/testing protocols, end-user distribution and data analytics. Because users/consumers expect rapid-fire software upgrades, the bullish narrative for FROG stock is very robust.

So, this is an easy buy, right? Well, one of the criticisms against FROG stock is that it’s overvalued. According to, JFrog is valued at over 57 times sales. To put that into context, the median PS ratio for software companies is only 2.6.

The Ins and Outs of FROG Stock

To be fair, JFrog is again operating in a niche market segment. Thus, the comparison to other software companies may not be accurate. Plus, FROG stock doesn’t have enough data to comfortably make a declarative statement about valuation.

As well, prospective buyers should consider the broader fundamentals. Obviously, the Covid-19 pandemic has brought astounding disruption not only to the U.S. but the international community. This has forced many people to work from home, creating new challenges for enterprise software firms.

But that’s where FROG stock can also benefit. Within the underlying company’s end-to-end solutions is the ability to work via a hybrid mechanism of on-premise and cloud operations. Long story short, JFrog can act as a content delivery network, bringing data closer to the edge of the network. This promotes reliability and enhanced transmission speed.

In addition, JFrog’s security protocols should help facilitate collaborative efforts between different teams, which are now operating from home (and therefore in several locations). Plus, JFrog’s architecture enables communication between different organizations that could be separated by international borders. Clearly, this is a huge benefit because of the shutdown in business travel and contactless mandates.

After the Pandemic

But what happens after the novel coronavirus eventually fades? In my opinion, it’s possible that FROG stock could see greater demand. That’s because many corporations will be looking to keep the money-savings associated with the new normal. To do that, JFrog’s software management services may play a crucial role.

On the surface, the compelling utility underlining FROG stock appear to make it a no-brainer investment. However, you also have to keep in mind that Covid-19 is a double-edged sword. While the pandemic provides higher demand profiles for end-to-end software integration/distribution solutions, the issuing client companies themselves may not want to invest the resources to develop those upgrades.

In this scenario, all the useful functions that JFrog provides could be moot.

Don’t Ignore the Competition

Before you make your final decision, you should be aware of the potential for direct competition. From what I understand, JFrog is the dominant leader in this niche software management space. Thus, the competition – names such as IBM (NYSE:IBM), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), to name but a few – are indirect. But that could change over time.

Presently, JFrog clients love its ecosystem’s intuitive nature and its compatibility with myriad other platforms. However, the process is somewhat akin to a middleman’s role. By itself, JFrog doesn’t offer a profoundly unique innovation. Rather, it helps enterprises communicate with their partners and to satisfy their end-users.

Logically, this means enterprises could theoretically develop their own in-house software management mechanisms. But more likely, the big dogs of software could leverage their own powerful brands to muscle their way in.

Combined with the uncertainty of the pandemic and how FROG stock may react, I see two approaches. For the aggressive speculator, you may want a very modest position now, which isn’t a terrible idea. However, for conservative investors, you should probably wait this one out. With the two variables of the health crisis and potential competition, JFrog appears overvalued right now.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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