JFrog Ltd (NASDAQ: FROG), the DevOps software platform provider, shed 3% after earnings. But here’s why this tech stock still looks like a long-term buy.
Tim’s Take:
JFrog is a relatively new company to the public markets, having only debuted in mid-September. However, the provider of critical DevOps software – including the uninterrupted software updates for companies – appears to have a solid business.
Having priced its IPO at US$44 per share, JFrog shares currently trade at around US$71. Following its first day pop of around 50%, shares have fluctuated and are now around 10% higher than where they ended their first day of trading.
Part of this could be explained by its relatively expensive valuation – with shares trading at a price-to-sales ratio of an eye-watering 52x.
Yet, that shouldn’t completely distract investors from its business. JFrog’s latest earnings saw the company deliver third-quarter revenue of US$38.9 million, up 40% year-on-year. This came in ahead of consensus estimates for US$37.9 million in sales.
Strong cash flows and margins
As I’d pointed out previously, for a tech company so young (and small), JFrog has some enviable margins.
In its latest quarter, the company delivered a gross margin of 82.7% while its non-GAAP operating margin stood at 13.2%, up from 8.8% in the same quarter last year.
Even more remarkable, the company has been free cash flow positive for five years and the latest quarter saw an improvement on that front, too.
Its free cash flow more than doubled to US$9.7 million in the third quarter while its free cash flow margin also increased to 24.9% (see below).
Source: JFrog Q3 2020 earnings presentation
JFrog is targeting a long-term operating margin of 23% while it wants to get to a free cash flow margin of 30%.
Its latest quarter suggests it’s on track to getting there. The reliable subscription revenue it generates (which makes up 100% of sales) means that its revenue visibility is high.
One thing investors should watch out for is the highly-competitive landscape, where companies such as Sonatype and GitHub offer competing services.
However, investors can also take comfort that JFrog’s growth story remains very much intact – albeit it’s an expensive one to invest in from a valuation perspective.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.
