JFrog trades at $45.02 and has moved in lockstep with the market. Its shares have returned 7.1% over the last six months while the S&P 500 has gained 5.2%.
Is there a buying opportunity in JFrog, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is JFrog Not Exciting?
We're swiping left on JFrog for now. Here are two reasons why we avoid FROG and a stock we'd rather own.
1. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
JFrog’s expensive cost structure has contributed to an average operating margin of negative 22% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if JFrog reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
2. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict JFrog’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 29.2% for the last 12 months will decrease to 21.2%.
Final Judgment
JFrog isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 9.5× forward price-to-sales (or $45.02 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of JFrog
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