JFrog (NASDAQ:FROG) is one of the latest tech stocks to begin publicly trading. Better still, JFrog is a software-as-a-service (SaaS) company. And they operate in the cloud sector. So what’s not to like about FROG stock?
My honest answer is maybe nothing. The company is free cash flow positive and some analysts believe the company may not be far away from profitability. That being said, companies go public when things are going well. Makes sense, right?
But the problem is that past performance doesn’t guarantee future results. And JFrog has had some great performance. However, will that translate into something sustainable?
This is not to suggest that JFrog did anything untoward in going public. In fact, they launched a traditional initial public offering (IPO). And in the year of the SPAC, that’s saying something. But the reality is that an initial public offering frequently is a one-sided affair. It benefits the company that’s going public. But to the early investors, particularly those who must hold onto shares during the lock-up period, frequently not so much.
There’s simply a lot that investors don’t know about JFrog and that means FROG stock is likely to be overvalued.
JFrog Offers an Essential Service
In today’s world, software updates have to take place seamlessly. And the problem is that enterprises use multiple platforms and literally span the globe, JFrog ensures the proper updates happen. The Israeli-based company produces development software that is used to manage and release software updates. It boasts the mantra “Release Fast or Die” on its home page.
This gives JFrog a compelling, if not small, niche. And for the time being, JFrog is the leader in this software management sector. Revenue is growing, albeit at a slower rate year-over-year. But still, the company is not without merit.
Don’t Say You Weren’t Warned
FROG stock is up 65% from its initial offering price of $44 per share. However, that’s down about 15% from its post-IPO high of more than $86 per share. In a recent article about JFrog, Mark Hake pointed out information from the company’s prospectus in which the company believed a fair price for its stock would be between $39 and $41 per share.
Once again, I’m not suggesting that JFrog is doing anything wrong. It’s just that IPOs always have a little caveat emptor to them. And with the stock falling 15% since hitting its IPO high, investors may be having that moment.
Make FROG Stock Prove It
The lock-up period for FROG stock is 180 days. To put that into perspective, that’s only slightly less time than we’ve been dealing with the novel coronavirus.
In other words, it seems like a long time, but it’s not. However in that time, there could be three significant developments.
First, we’ll know if one party will have the balance of power, or if there will be gridlock. Second, we’ll be six more months closer to a medical solution to the virus. Both of these developments may have a direct impact on FROG stock. Josh Enomoto provided more details on why the pandemic could be a double-edged sword for JFrog’s business model.
But I believe a more important development will be the one, if not two earnings reports investors will receive during the lock-up period. These reports are not the be-all and end-all. They usually include a great deal of spin. However, they also contain facts. And facts don’t care about our feelings.
All of which is to say I’m not being negative about JFrog as a company or FROG stock. I just don’t know what to expect from the company. Even after the lock-up period ends we won’t have a robust data set. But we will have more information than we have now.
And with a stock that’s fallen 15% from its post-IPO high, that’s information worth waiting for.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.