JFrog Ltd. (FROG): A Bull Case Theory

We came across a bullish thesis on JFrog Ltd. (FROG) on Elliot’s Musings’ Substack by Elliot. In this article we will summarize the bulls’ thesis on FROG. JFrog Ltd. (FROG) share was trading at $28.12 as of Sept 17th.

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Concerns about JFrog’s viability as a standalone company have centered around the risk of its flagship product, Artifactory, becoming commoditized. The company has been urged to expand into security and shift to a more aggressive sales strategy to stay competitive. Despite these challenges, the sharp 30% drop in JFrog's stock following its Q2 earnings report has opened up an investment opportunity.

JFrog’s Q2 earnings met expectations, but the company revised its full-year guidance downward due to macroeconomic pressures and unpredictable revenue from its cloud segment, which largely relies on monthly billing. The company reported $103 million in revenue, hitting the low end of its guidance, and attributed the reduction to increased deal scrutiny and reduced usage among small and medium-sized businesses. JFrog is transitioning its cloud customers to annual contracts to bring more predictability to its revenue stream.

While JFrog’s growth showed some deceleration, its customer metrics remained positive. The company now has 42 customers generating over $1 million in ARR and saw a 14% year-over-year increase in customers with ARR over $100,000. Additionally, 50% of revenue now comes from customers using the entire JFrog platform, a critical indicator of long-term success. However, the company’s security segment, an essential part of its growth strategy, is not expected to drive significant revenue until 2025, raising concerns about the timing of its market expansion.

Despite these headwinds, JFrog’s net dollar retention rate was 118%, indicating strong customer loyalty, and gross retention rates remained stable. The guidance cut does not appear to stem from competitive pressures or higher churn, and management's conservative revision sets a more attainable benchmark, de-risking future performance. This provides a potential upside as the macro environment stabilizes and delayed deals close.

At a $2.3 billion enterprise value, JFrog is now trading at attractive multiples compared to historical acquisition prices in the software space. Assuming moderate growth and margin expansion, the stock could reach $30 by 2028. With potential for mergers and acquisitions and reasonable growth projections, JFrog’s current valuation presents a compelling entry point for investors seeking long-term returns.

JFrog Ltd. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held FROG at the end of the second quarter which was 40 in the previous quarter. While we acknowledge the risk and potential of FROG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FROG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.