JFrog: Riding the Digital Transformation Wave with Renewed Upside Potential
JFrog (FROG) is a US-Israeli provider of a software supply chain development platform that enables organizations to manage end-to-end lifecycle of software development, from development, to release, and to security.
The company has been benefiting from the secular digital enterprise transformation trend, which includes cloud migration as a key entry point. Cloud migration is the process of moving on-premise business data and applications to the cloud, making it a critical part to modernizing an enterprise IT environment. FROG’s offerings help enterprises achieve this by streamlining the software development supply chain from code-development to release, making it a sensible investment decision for capital-intensive digital transformation projects.
Despite temporary headwinds in the form of delayed enterprise cloud migration projects, the recent pullback to $37 provides a solid buy opportunity. FROG’s strong fundamentals, including decent revenue growth, significant operating cash flow expansion, and a solid liquidity position, support its upside potential.
Key Takeaways and Catalyst
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Catalyst:
The restart of delayed cloud migration projects will continue to emphasize the importance of IT cost optimization, which is achieved mainly through vendor consolidation. FROG is well-positioned to reap the benefit here, because of the nature of its solutions that address the whole software development supply chain.–
Key Takeaway:
The macro challenge that has delayed several enterprise cloud migration projects FROG has been involved in may potentially subside, providing bookings acceleration in the second half of FY, as commented by the management in Q4.Risk
FROG’s market share capture in the enterprise segment may potentially elevate revenue concentration risk. Almost half of FROG’s revenue in FY 2023 came from enterprise subscriptions, compared to just 38% last year. This has resulted in the top 10 customers making up as much as 7% of FROG’s revenue as of FY 2023.
Valuation
To estimate the target price for FROG in FY 2024, the following bull vs bear scenario in a 5-year revenue projection is assumed:
Bull scenario (50%):
FROG to finish FY 2024 with a revenue of $428 million, a 22% YoY growth, in line with the company’s guidance. In this scenario, most cloud migration projects are expected to restart in the second half, giving FROG further revenue visibility into the FY. P/S to expand to 12x, the level where it recently saw a YTD high.Bear scenario (50%):
FROG to finish FY 2024 with a revenue of $420 million, a 20% YoY growth, which is $8 million lower than the company’s low-end revenue guidance. FROG is expected to see continued headwinds and unexpected churn. In this scenario, the market will reach negatively, resulting in sideways price action for the stock.Consolidating all the information above into the model, a FY 2024 weighted target price of ~$43 per share is arrived at. This represents almost 16% upside from the current price of $37. FROG is upgraded to buy.
Conclusion
JFrog is a compelling opportunity that will continue to benefit from the secular enterprise digital transformation trend. The recent pullback provides a good buying opportunity. The 1-year price target of $43 means that FROG is eyeing almost 16% upside at year’s end.
