Why JFrog Stock Is Now a Compelling Contrarian Trade

JFrog Ltd Has Opportunities in $25-Billion Market

With the technology and growth sectors of the stock market getting slammed in 2022, I’m beginning to see numerous opportunities to pick up severely beaten-down growth stocks. While the selling of technology stocks might not be over yet, contrarian traders should take a look at some of the battered stocks.

Take the case of mid-cap JFrog Ltd (NASDAQ:FROG), which is 66% below its 52-week high of $50.31 and 82% below its record high of $95.20, which was set in October 2020. Moreover, FROG stock is down by 42% this year.

The initial surge by JFrog stock was clearly excessive, but with the recent selling, I’m seeing a decent risk-reward entry point.

My bullishness about JFrog Ltd is driven by the tailwinds in the company’s development operations (DevOps) software business. DevOps combines software development and IT operations to help developers deliver software to end users.

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One report estimates that the DevOps market was more than $7.0 billion in 2021 and could grow at a compound annual growth rate (CAGR) of more than 20% until 2028. (Source: “DevOps Market Size,” Global Market Insights, last accessed May 18, 2022.)

This implies a market of more than $25.0 billion by 2028 and supports the business model of JFrog Ltd.

Chart courtesy of StockCharts.com

FROG Stock to Maintain Double-Digit Revenue Growth

JFrog Ltd has only reported three years of financial history, but so far, that history has been impressive.

The company grew its revenues by 225% from $65.5 million in 2018 to $206.7 million in 2021, representing a CAGR of 47.9%. The last three years included double-digit growth.

Analysts expect the positive trend to continue. They estimate that JFrog will report revenue growth of 32.3% to $273.4 million for 2022 and revenue growth of 27.6% to $348.8 million in 2023. (Source: “JFrog Ltd. (FROG),” Yahoo! Finance, last accessed May 18, 2022.)

While the company’s revenue growth has been positive, its valuation of about 5.9 times the consensus 2023 revenue estimate is indicative of a growth stock.

Fiscal YearRevenue (Millions)Growth
2018$63.5N/A
2019$104.764.8%
2020$150.844.0%
2021$206.637.0%

(Source: “JFrog Ltd.” MarketWatch, last accessed May 18, 2022.)

The key for JFrog stock is for the company to control its costs and move toward positive earnings before interest, taxes, depreciation, and amortization (EBITDA), which has eluded the company so far.

Fiscal YearEBITDA (Millions)Growth
2018-$25.0N/A
2019-$2.191.4%
2020-$8.0-271.8%
2021-$44.0-451.9%

(Source: MarketWatch, op. cit.)

JFrog Ltd also needs to move toward generally accepted accounting principles (GAAP) diluted earnings-per-share (EPS) profitability, which has also eluded the company.

Fiscal YearGAAP Diluted EPSGrowth
2018-$0.29N/A
2019-$0.0679.3%
2020-$0.20-238.9%
2021-$0.68-234.9%

(Source: MarketWatch, op. cit.)

After adjusting for non-recurring expenses, the company scratched out a small profit of $0.03 per diluted share in 2021. Analysts estimate that JFrog Ltd will break even this year, prior to turning a profit of $0.07 per diluted share in 2023. (Source: Yahoo! Finance, op. cit.)

Those numbers are still low, but FROG stock shareholders hope the company can accelerate its profitability growth.

On the plus side, JFrog Ltd has managed to churn out positive free cash flow (FCF) from 2018 to its record high in 2021. The positive FCF gives the company financial flexibility.

Fiscal YearFCF (Millions)Growth
2018$6.5N/A
2019$8.226.4%
2020$25.9216.3%
2021$28.710.8%

(Source: MarketWatch, op. cit.)

At the end of December 2021, JFrog Ltd’s balance sheet had solid working capital, minimal debt of $27.3 million, and cash of $421.1 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Institutional ownership of JFrog stock is broad and decent, with 250 institutions holding a 64.8% stake in the outstanding shares of JFrog Ltd. (Source: Yahoo! Finance, op. cit.)

My view is that, after the significant amount of selling of FROG stock, the company’s expected financial growth sets the stock up as a compelling opportunity.