JFrog IPO: Should Investors Buy This DevOps Tech Stock?

Author: Tim Phillips

September 22, 2020

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Recently-public DevOps software firm JFrog Ltd (NASDAQ: AMWL) gained 3.4% overnight and is up over 50% from its US$44 IPO price when it listed last week.

Tim’s Take:

For investors, JFrog operates in a weird space between development and operations, dubbed DevOps. Effectively, the company allows for continuous software release management – effectively uninterrupted software updates.

This is extremely important for companies as the bridge between developing an update (from the developer side) and implementing it (from the operations side), can be extremely cumbersome.

That’s where JFrog comes in. Its unified platform allows developers and operations teams to work in unison to ensure rolling software updates for enterprises.

It’s a niche space but it’s the undisputed leader in it. It’s likely its IPO got overshadowed by the publicity surrounding Snowflake yet I actually think this is a more interesting business for investors who are thinking long term.

Why? First off, amazingly, the company is already close to profitability. It made a net loss of just US$400,000 in the first half of 2020. JFrog has now been free cash flow positive for five years.

The company had around 50% revenue growth in the first six months of 2020, pegging its total revenue number at around US$70 million.

Diversified customer base

However, the key selling point for me is its customer base; a whopping 5,800 customers. And they’re not small ones either.

They count all ten of the top tech firms as customers, including Netflix (NASDAQ: NFLX) and Spotify (NYSE: SPOT), as well as financial services and healthcare firms. In fact, 75% of the Fortune 100 are customers of JFrog.

No single firm contributes more than 2% of JFrog’s revenue. Talk about customer diversification. And they’re spending more money with the company.

JFrog had a net retention rate of 139% in its latest quarter, meaning existing customers were spending 39% more with JFrog than before.

The only reservation I’d have is that it just went public and we all know there will be opportunities for long-term investors to buy once the post-IPO hype dies down.

However, in a market where Snowflake is massively loss-making and trading for 135x price-to-sales (PS), JFrog shares could be considered “cheap” on a relative basis given they’re trading at 45x.

With a market cap of only US$6 billion, and equipped with all the right attributes to keep growing well into the future, JFrog is definitely one I’m adding to my watchlist.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares in any companies mentioned.

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About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.