Given JFrog’s (NASDAQ:FROG) tough competition, less-than-stellar online reviews, slowing growth, and huge valuation, I recommend selling FROG stock at this point.
Moreover, there’s evidence suggesting that JFrog’s offerings are not meaningfully differentiated from those of the competition, while its competitive advantage is not that powerful.
Tough Competition and Uninspiring Reviews
In the wake of JFrog’s third-quarter results, Srini Nandury, an analyst at Summit Insights, reported that most of JFrog’s customers also use competing tools. The analyst added that the company is facing “heavy competition.”
And according to the analyst, JFrog has indicated that a majority of its sales growth has been generated by selling more products to existing customers, rather than recruiting new clients. That certainly does not bode well for the company’s longer-term outlook, since it’s obviously much easier to expand rapidly by adding new customers than by selling more to existing clients. As of Nov. 6, Nandury had a $50 price target and a “sell” rating on the shares.
By my count, on the first page of reviews of JFrog on the website G2, the company received eight “5-star” ratings, eight “4.5-star” ratings, six “4-star” ratings, and three “3.5-star” ratings. The first page contains the most recent reviews of the company’s products.
That’s a very good, but certainly not a great or extremely impressive, showing. Indeed, only eight of 25 reviewers gave the company five stars, and some of the reviews included important criticisms of the company.
Reviews Amplified
One reviewer wrote that the system “has some problems in installing and updating artifacts.” I’m not a tech expert, but I believe that difficulties with updating is a major problem for a company whose main selling point is the ease of its continuous updates. Similarly, another reviewer wrote ” CI/CD {continuous integration and continuous integration} and DevOps {developer} tools are not to my liking and I think other systems like EC2 and Red Hat offer better solutions.”
As I’ve noted in the past, developers have become very important for many companies, while CI/CD seems to have become critical for many firms as well. As a result, shortcomings in these areas are problematic for JFrog which sells an IT platform. A third reviewer complained that the company only allows “the basics” when it comes to security. Without a doubt, security is very important to many companies now.
Slowing Growth and Extremely High Valuation
JFrog’s revenue increased 65% last year, 50% year-over-year in the first six months of 2020, and 40% YOY last quarter. The company’s sales growth is clearly going in the wrong direction for the owners of FROG stock. And its growth is decelerating before it has even become profitable; its operating loss over the 12 months that ended in September came in at $5.4 million, and its Q3 earnings per share, including all items, was -14 cents.
FROG stock is trading at 41 times its sales over the 12 months that ended in September. That is, by any measure, a very large number. For example, Fastly (NYSE:FSLY), which is often accused of having an out-of-control valuation, is changing hands for 31 times its trailing sales.
A Lack of Differentiation and Strong Competitive Advantage
Nandury, the Summit analyst, stated that Frog has “limited differentiation.”
I think he may be indicating that the firm’s main selling point is not that valuable to companies. Frog says that it enables “software {to be} updated seamlessly and securely without the hassle of update processes and downtime,” in the words of its CEO on its most recent earnings conference call.
But is preventing a little downtime late at night every six months or a year really all that important? And how much “hassle” do updates cause companies with multiple IT employees? My educated guess is that the answers to those questions would be, respectively, “not very” and “not too much.” As for the security issue, companies’ existing security tools likely prevent hacking during updates.
Perhaps JFrog’s growth has been slowing and it’s had a hard time finding new clients because its service is not extremely valuable and/or differentiated.
The Bottom Line on FROG Stock
Investors should sell the shares because the company’s growth is slowing significantly, while its valuation is high and its competitive advantage may not be that strong.
On the date of publication, Larry Ramer held a long position in Fastly.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
