You could see it as a slightly odd, sell-the-news reaction. But following a less-than-well-received earnings report, it may actually be a good time to buy JFrog (NASDAQ:FROG) stock.
A little over two weeks ago and shortly after the broader market found its legs off October’s correction and Wall Street cheering a presumptive Biden Gridlock Tour, recent IPO “liquid software” DevOps play JFrog delivered an earnings worthy of catching the eye of growth stock investors. And the report did.
But the results off the chart compared to FROG’s price action likely surprised investors in search of the next, next big thing.
Not What We Expected
In a nutshell, JFrog topped consensus top- and bottom-line forecasts while continuing to show solid growth. By the numbers, FROG reported profits of 5 cents compared to breakeven Street views. Profits for the quarter also improved upon last year’s earnings of just 3 cents.
At the same time, sales grew by 40% to $38.9 million while also squeezing past a consensus forecast of $37.9 million. FROG’s brass also updated investors with slightly above-views guidance for its December quarter.
All told — and given the general and healthier market environment — it’s not a stretch to think Frog stock would have jumped higher following the report. Yet it failed to in a noticeably big way. Shares actually sank by nearly 10%. Profit-taking? Not exactly. Sell-the-news? In a weird sort of way, yes.
Frog Stock Daily Stock Chart
Click to EnlargeSource: Charts by TradingView
So, where does that leave FROG as an investment? Right now and given a couple more weeks for investors to sort things out, maybe even more surprising, shares have come under additional pressure. In fact, shares fell another 11.50% at last week’s weakest, while also striking new lows. What the heck is going on, right?
Consider Amazon (NASDAQ:AMZN). Apple (NASDAQ:AAPL). Microsoft (NASDAQ:MSFT). Netflix (NASDAQ:NFLX). Even the best and largest stocks will succumb to corrections. And in fact, it’s happening to those same tech giants despite new highs in the S&P 500 index and Dow Jones Industrial Average. They’re not alone either.
Chalk up the overall weakness in many of today’s leading tech stocks to a rotation trade that’s followed in the wake of positive vaccine developments from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) over the past two weeks. Of course, that fails to hold water with FROG. Shares have been falling since late October and decoupled from the broader averages. So, are all bets simply off the table? I don’t believe so.
As a general rule, the good news is that stocks of FROG’s caliber can and will routinely correct by 30%, give or take a few percent. And that standard is what’s common in healthier market environments when most risk-assets are being hoisted higher. Having said that and given today’s more fragmented stock market, warts and all, FROG may yet turn into a princely investment.
Attractive Growth at a Discount
To be sure, finding the next AAPL or NFLX is tough. But Frog stock does offer investors fairly attractive growth that’s being heavily discounted at the moment. So, it does have that going for it. As well and technically, buying shares today could be viewed even more favorably as a contrarian stock to buy.
On the price chart, a worrying bearish flag is forming in shares. Yeah, this isn’t going to appeal to any growth-oriented, cup-with-handle investors. Having said that, and as to avoid the flag pattern’s promised kiss of death, buying a modestly out-of-the-money bull call spread rather than long stock, looks like appropriate exposure in FROG.
On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
