This week is the busiest for IPOs in more than a year, with Snowflake NYSE: SNOW taking center stage. The hype is justified on Snowflake.
But some investors are overlooking JFrog NASDAQ: FROG. Don’t be one of them.
The “liquid software” company is revolutionizing the way application updates are delivered.
A Future of Continuously Delivered Updates in the Background
In the past, there was a limit to how often apps could offer updates to users. An app owner couldn’t deliver multiple updates per day, because they would be forced to take down their service each time. Customers would quickly get annoyed.
JFrog’s service allows app owners to deliver application updates in the background, without interrupting the user experience. This is possible because the software is delivered as binaries.
The company’s massive growth rate and impressive metrics show how valuable its service is to customers. And there is reason to believe JFrog is just getting started.
JFrog Has Huge Potential
JFrog reported $69.25 million in revenue over the first six months of 2020, putting it on an annual pace of just under $140 million.
The company’s market cap is now nearly $6 billion, giving it a price to sales ratio of more than 40x.
But shares are actually an excellent value at current levels. Here’s why:
- That $69.25 million in revenue is up 50% yoy, which comes on the heels of 65% revenue growth in 2020. Revenue growth of 50% isn’t too shabby, but JFrog believes it would have been even higher if not for the pandemic.
- According to IDC, the DevOps tools market will be worth $18 billion by 2024. JFrog competes in this market, and believes it has a total addressable market size of $22 billion.
- JFrog isn’t one of those software companies that racks up huge losses year after year. The company reported a net loss of $400,000 in the first six months of 2020 after recording a net loss of $5.4 million in full-year 2019.
JFrog is a Hit Among the Heavyweights
JFrog counts 75% of Fortune 100 companies among its customer base and a total of 5,800 customers use JFrog.
It now has 286 customers that generate $100,000 in annualized recurring revenue (ARR), up 56% in Q2. Again, that growth rate was slower than the year-ago quarter (63%) due to the pandemic.
Not only is JFrog attracting new customers – it is getting its existing customers to spend more. The company’s net dollar retention rate is 139%.
Subscription businesses are, all things being equal, a great place to put your money; the recurring revenue offers predictability, habits are sticky, and there are often switching costs or a learning curve when moving to a new service.
But JFrog is no ordinary subscription business:
It has a revolutionary service, is rapidly acquiring new customers and its existing customers are spending a lot more over time.
Initiate a Small Position Now… Look to Add More Shares Later
Demand was very high for JFrog’s shares leading into yesterday’s open.
The IPO was originally targeted at $33 to $37 a share. Then, talks put shares in the $39 to $41 range. Finally, the IPO was priced at $44 a share, with 11.6 million shares offered.
The first trade came in at $71.27 a share for 1.8 million shares, 62% higher than the elevated IPO price.
Even though shares would touch $77 a share, they closed at $64.79, near the day’s lows of $64.03.
I’m not too thrilled with this price action, as you never want to see shares close near the day’s lows after trading much higher. But it’s just one day, so I’m careful not to overreact.
A good play on JFrog is to pick up a small number of shares now. This company has huge long-term upside and even a small positioncan pay off handsomely in the long-run, without exposing you to a high downside.
Then, if JFrog forms a proper base over the next couple of months (give or take) and shares break out, you can look to add to your initial position.
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