JFrog has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.5%. The stock now trades at $84.13, marking a 23.5% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now still a good time to buy FROG? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Are We Positive on FROG?
Named after the amphibian that continuously evolves from egg to tadpole to adult, JFrog (NASDAQ: FROG) provides a platform that helps organizations securely create, store, manage, and distribute software packages across any system.
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
JFrog’s ARR punched in at $615.2 million in Q1, and over the last four quarters, its year-on-year growth averaged 23.7%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes JFrog a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
JFrog is quite efficient at acquiring new customers, and its CAC payback period checked in at 29.1 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a strong brand reputation, giving it more resources pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments. 
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
JFrog has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 26.9% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.
Final Judgment
These are just a few reasons why we’re bullish on JFrog, and with its shares beating the market recently, the stock trades at 15.1× forward price-to-sales (or $84.13 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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