Frugal startups should pay attention to how JFrog’s IPO prices

@alex / 8:53 am PDT • August 31, 2020

In last week’s IPO wave, one company fell a bit by the wayside amongst filings from better-known companies like Asana and Palantir. JFrog, a company that TechCrunch reported helps allows developers and companies deliver application updates “in the background without disturbing the user experience” when it raised $165 million in 2018, is positioned for an exciting debut.

Why? The unicorn — the same 2018 round valued JFrog at around $1.2 billion according to PitchBook data — has a unique blend of growth, margins and profitability that should make its pricing cycle incredibly interesting.

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JFrog will give us an insight into how Wall Street will value a fast-growing, managed software company that also doesn’t lose money. It’s not something we see often, and other market hopefuls like the aforementioned Asana and Palantir are far from similar levels of profitability.

Let’s take a quick look at what JFrog would be worth if it were a more normal — read: less profitable — SaaS company, and then ask what it might be worth as a cash-generating, recently profitable concern. The numbers are pretty surprising.

JFrog

If you want more on the basics of JFrog’s business and why developers and companies care about the company, head here. We’re only doing numbers today.

Back to the basics as a refresher from early last week, here’s what you need to know about JFrog’s business:

Revenue grew from $63.5 million in 2018 to $104.7 million in 2019 and from $46.1 million to $69.2 million from the first half of 2019 to the first half of 2020. Those gains of 65% and 60.1%, respectively, put JFrog on a comfortable growth pace for a company doing nine-figure revenues.
JFrog has lost less money as it has grown. From $1.00 per share in 2018 to $0.20 per share in 2019, and from $0.08 per-share in the first half of 2019 to just $0.02 per share in the first half of 2020.
JFrog’s gross margins have been 81% or better in every mutliquarter period we have record of.
JFrog’s operating cash flow has improved over time as well, rising from +$8.6 million in 2018 to $10 million in 2019, and from +$0.415 million in the first half of 2019 to +$5.9 million in the first half of 2020.
And, after some quarters of extremely limited losses, JFrog posted its first known (since Q1 2018) GAAP profitable quarter in Q2 2020, generating $1.7 million in net income off of revenues of $36.4 million in the same period.

Now ask yourself, what is that company worth?

Comparing it to Bessemer’s Cloud Index median results, JFrog has better revenue growth (+27.5% median), gross margins (74% median), though trailing cash flow as a percentage of revenue (5.5% median) looks bad because JFrog has so much cash that it cycles its funds through short-term investments, which make its free cash flow results look bad.

JFrog also largely whumps the same index’s average results, which are stronger than the median figures. This means that JFrog should trade at more than the current enterprise value multiple that Bessemer calculates as 19.2x for today’s public cloud and SaaS stocks.

Enterprise value is market cap, plus debt minus cash and JFrog has no debt and somewhat limited cash as it stores its excess in short-term notes because it is rich and doesn’t need to use its banked funds to pay for its operations.

Whatever. For our purposes, we’re going to do caveman math and use the enterprise value multiple for a market cap calculation built against run-rate multiples. Namely, at the end of JFrog’s Q2, the company had a run rate of $145.7 million. At a 19.2x multiple, the company would be worth $2.8 billion, give or take.

That is a gain of +133.3% since its 2018 round, with the value of the company more than doubling.

But with profits and such high margins and still-solid growth, why wouldn’t JFrog earn a better multiple? Cloudflare, for example, is growing more slowly, has far worse cash flow results, lesser gross margins, and it’s worth 28.7x its current annualized revenue. At that multiple, JFrog is worth $4.2 billion!

ZScaler? Closer gross margins, slower growth, but with reasonable cash flow results? Its enterprise value is 40.9x its current annualized revenues. At that multiple, JFrog is worth just under $6 billion!

The right answer is probably somewhere in there, tilted toward the higher end, but the sheer range of possible valuations and comps make the JFrog IPO a particular puzzle. Zoom famously had profits on its S-1 when it debuted, and it trades for an enterprise value worth more than 60x its current, annualized revenue. Is that possible for JFrog?

I have precisely and exactly zero idea. But all this is why the JFrog IPO is so damned interesting and possibly illustrative.

Talking to startups over the last six months, a theme that I’ve noted has been startups stressing how much cash they’ve not yet spent. How close to break-even they have run. How they have made money here and there. Amongst the most successful startups frugality has seemed hot, at least anecdotally. And with JFrog, startups that have been keeping their dollars safe might see what sort of premium profits bring over bog-standard SaaS growth.

More when we get an initial price range (whatever it is, expect it to go up).

Frugal startups should pay attention to how JFrog’s IPO prices

JFrog

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