$FROG - JFrog Investment Idea

Company Overview:

$FROG - JFrog Corp. is a “Liquid Software”, which essentially means that it is “version-less”, meaning that it always stays up to date due to incremental improvements. JFrog’s platform acts as a bridge between software development and deployment, enabling organizations to build/release software faster and more securely. JFrog has many different types of products that they offer to their customers, both at an enterprise and customer level.

JFrog provides DevOps platforms which power supply chain software, which is becoming increasingly important. Additionally, the volume/importance of software is expanding rapidly, which presents JFrog with another opportunity for extreme growth. As of December 31^st, 2021, JFrog has over 6,650 organizations that have adopted their platform.

JFrog’s Platform:

Antifactory:

JFrog built the first ever universal software package repository (JFrog Artifactory), which they believe can/will transform the software cycle using their package-based approach.

Software packages are combinations of binary files that can be released/deployed to environments where they can be executed (run). JFrog’s Artifactory platform manages and deploys all types of software packages, which makes them “software storage system” for their clients.

The volume of these software packages has increased exponentially over the past decade. These packages need to be managed and stored and require a new approach to storage. JFrog provides a systematic and automatic approach to the management/storage of these packages.

Furthermore, JFrog’s “liquid software” allows for constant micro updates, which eliminate the need for “versions”. By eliminating software versions JFrogs Artifactory is always current/updated, and it allows for software releases to be continuous.

Lastly, JFrog is designed to be indifferent to the programming languages and development technologies, so that any customer can integrate their software seamlessly. This helps JFrog appeal to the widest amount of potential clients as possible.

JFrog Pipeline:

JFrog’s Pipeline is a continuous delivery tool that is responsible for automating the movement of software packages in their Artifactory. JFrog’s Pipeline also provides visibility and control over the software release cycle, providing coordination.

JFrog X-Ray:

JFrog’s X-Ray scans Artifactory to secure all of the software packages stored in it. JFrog’s X-Ray breaks down the packages, uncovering potential vulnerabilities, policy violation, and compliance issues. This allows organizations to control and trust their software release cycles and packages.

JFrog Distribution:

JFrog’s Distribution uses proprietary technology to distribute packages to multiple locations and update the packages as needed. JFrog’s distribution offers support for major package technologies, allowing for seamless software releases.

JFrog Mission Control:

Mission control is a “control panel” that provides a high-level view of an organization’s software supply chain workflow.

JFrog Insights:

JFrog’s insight is a universal DevOps tool that provides customers with powerful analytical capabilities. JFrog’s insight processes and collects key metrics to provide insights to managers, teams, and officers within an organization.

JFrog Connect:

JFrog’s Connect allows companies to manage software updates and monitor their performance(s). JFrog’s Connect is a by-product of their acquisition of Upswift in 2021.

Investment Information:

Benefits derived from JFrog Products:

Unification: JFrog developed their products to integrate with each other, allowing organizations to manage their software cycles effectively/efficiently through a single access point.
Automation: JFrog enables automation of workflows providing coordination between development and operations. This automation is unique and allows for increased efficiency for both building and deploying.
Cloud Deployment: JFrog uses cloud technologies to help their clients avoid vendor lock-in and allow the use of their products in any environment.
Scalability: JFrog supports a variety of storage capabilities and can accommodate sudden increased in usage without experiencing compromised performance.
Security: JFrog’s X-Ray enables automation of security with customizable governance policies. Furthermore, all of the packages on JFrog are traceable which ensures the accuracy/reliability of software applications.
Integration: JFrogs integration with third-party technologies offers developers and operators the freedom to choose their tool stacks.

Growth Strategies:

Extend Technology: JFrog plans to continue investing in new capabilities and additions to their platform to make their product better. Additionally, JFrog wants to continue acquiring software companies and technologies to rapidly adapt to the quickly-changing software environment.
Retention and Upgrading: JFrog recognizes they have a large customer base with some of the most notable companies in the world. JFrog needs to retain these customers and eventually get them to upgrade their subscription for more access and memory. These recurring revenue streams are vital for JFrog’s future.
New Customers: JFrog is continuing to explore low-friction product adoption methods to maximize their conversion from free-trial to paid customer.

SEC Filings:

Current Report (8-K)
- On January 28^th, 2022, JFrog released their Q4 earnings report
  - $5.1B in Q4 earnings ($15.6B annually), Free Cash Flow of $21.1B in 2021, $11.6B worth of share repurchases or dividends paid out in 2021, and a Full-Year EPS of $8.14.

Acquisitions:

In July 2021, JFrog acquired a 100% interest in Vdo, which is a product security platform for automating software security tasks. This acquisition expanded JFrogs product offering and provides JFrog with a chance for future growth.

One month later (August), JFrog acquired Upswift, who provides their device management platform.

Management Team:

This sectioned is designed to give you (the reader) insight into the background of the highest (executive) managers/officers at Asbury. The following people are listed as the highest-ranking members of the JFrog Management Team.

Shlomi Ben Haim (Co-Founder & Chief Executive Officer): Mr. Ben Haim has been JFrog’s Chief Executive Officer since April 2008 and their Chairman of their board since January 2020.

From June 2006 to June 2009, he was the CEO of AlphaCSP a company implementing software applications before they got acquired in 2009. Prior to 2006, Mr. Haim was as an executive director.

Yoav Landman (Co-Founder & Chief Technology Officer): Mr. Landman has served as a member of JFrog’s board of directors and as Chief Technology Officer since April 2008.

From January 2002 to December 2008, he was also with AlphaCSP, where he served as a Senior Consultant and as a member of management. Mr. Landman is also the creator of JFrog Artifactory. Mr. Landman holds a Masters of Computing from The Royal Melbourne Institute of Technology, Australia

Orit Goren (COO): Orit has plenty of experience in the high-tech industry, having served as VP of HR for Pontis, SolarEdge, Voltaireas, and HR roles at Intel.

Jacob Shulman (CFO): Mr. Shulman has served as JFrog’s Chief Financial Officer since May 2018. Prior to this, he was with Mellanox Technologies, (supplier of computer networking products) most recently as Chief Financial Officer from 2012 to 2018, VP of Finance from March 2012 until November 2012 and Corporate Controller from 2007 to 2012.

As you can see, JFrog’s highest level management officers all have prior experience in top management positions. This leads me to believe that they are well-suited to be “at the helm” of JFrog.

Competitors:

In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I came up with the following.

$QLYS - Qualys Inc: Qualys, Inc. provides cloud-based information technology (IT), security, and compliance solutions in the United States and internationally. The company offers Qualys Cloud Apps, which includes Vulnerability Management, Detection and Response, Threat Protection, Continuous Monitoring, Policy Compliance, Cloud Inventory. Qualys also provides asset tagging, reporting and dashboards, remediation and workflow, data correlation/analytics engine, and alerts and notifications. Qualys serves enterprises, government entities, and small and medium-sized businesses in various industries,
$RPD – Rapid 7 Inc: Rapid7, Inc. provides cyber security solutions. The company offers a cloud- insight platform that enables customers to create and manage analytics-driven cyber security risk management programs. Its platform includes InsightVM (Vulnerable Risk Management), InsightIDR (Incident Detection); InsightAppSec (Application Security); and InsightConnect. Rapid 7 serves customers in a range of industries, in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
$HCP – Hashicorp Inc: HashiCorp, Inc. provides multi-cloud infrastructure automation solutions worldwide. The company offers Terraform, where processes and configuration required to support applications are codified and automated, and Vault, a data protection and security platform. It also provides Consul, which enables security and operations teams to manage application traffic; and Nomad, which manages schedules and the application lifecycle.
$GTLB – GitLabs Inc: GitLab develops software for the software development lifecycle. GitLab allows users to create, review, and deploy code. The company also offers “GitLab CI”, a continuous integration and deployment tool; and “GitLab Serverless” that enables enterprises to run server less workloads on any cloud using Google's Knative. In addition, it offers consulting, training workshops, development, and other support services.

Financial Information:

Yearly Financial Performance (Good): In 2021, JFrog was able to increase their revenues by 38%, their gross profits by 35%, and reported a positive free cash flow (although it was down 9% when compared to 2020 levels).
Yearly Financial Performance (Bad): In 2021, JFrog’s cost of revenues increased by 47% (larger than their revenues, which is unfavouable), their operating loss grew by 382%, and their net losses grew by 782%. This looks really bad on the surface, however, they did acquire 2 companies during 2021, which has negatively affected their earnings.
Q4 2021 Financial Performance (Good): In Q3 2021, JFrog was able to grow their revenues by 39% (from Q4 2020 (YoY)), increased their gross profits by to 34%. Lastly, JFrog increased their Free Cash Flow by 40% which is good to see.
Q4 2021 Financial Performance (Bad): JFrog reported a substantially higher operating loss and net loss, which is very unfavourable.

Investment Valuation:

Comparable Analyses: (Spreadsheet found at the end of this analysis)

By comparing JFrog’s financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following:

PEG Ratio:

Based off of JFrog’s PEG Ratio in comparison to their competitors, $FROG stock should be valued at $209/share, which would imply a share price increase of 737% which is obscene, so I disregarded it.

P/S Ratio:

JFrog’s P/S ratio (compared to their counterparts) indicates that the FROG stock should have a fair value of $47.37/share, which would imply an upside of 90% in order to reach their fair value.

EV/Revenue Ratio:

JFrog’s EV/Revenue ratio indicates that their fair value is $44.35/share, which would translate into a potential upside of 78%.

Comparable Valuation:

Due to the large variability between comparable analyses, I decided to take average the 2 comparable results that were reasonable. By doing this I arrived at a final comparable valuation of $45.86, which implies an upside potential of 84 %

DCF: (Visualization found at the end of this analysis)

By inputting the necessary data into my DCF model, I arrived at a fair valuation of $FROG stock of $39.47/share, which implies an upside of 58%

Overall Valuation:

In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $FROG stock. I did this through taking the average valuation of the Average Comparable, and the DCF model. By doing this I arrived at a price target for the $FROG stock of $42.66/share, which implies an upside of 71%.

Investment Plan:

My plan for an investment in the $FROG stock would go as follows:

Enter into a position below $25/share
Hold long-term
Re-evaluate the position as new data is released (especially their financial reports to see if they continue their growth, or if their growth starts to fall short of expectations).