JFrog (NASDAQ: FROG) is a small DevOps platform shaking up an industry projected to grow at a 20% CAGR for the next five years. Its Enterprise+ package provides an end-to-end software supply chain that resonates with users, which is important in today's world of accelerating digital usage and AI. The problem with the Q1 results is that growth is slowing for this highly-valued business. It was among the highest-valued tech stocks worth buying, trading at 67X this year’s and 58X next year’s earnings outlook ahead of the release. At those levels and projected growth rates, it will be four to five years before the results align with sentiment, which is reason enough for investors to take profits. 

The takeaway for today is that JFrog is gaining momentum with its enterprise-level clients and could accelerate growth and profitability over time. The company is among the smallest DevOps platforms, with about $430 in projected revenue for 2024, less than half the projected take for GitLab (NASDAQ: GTLB). It will take time for JFrog to grow, but it is on track to double in size over the coming years, putting the high valuation back into perspective. In this light, the pullback in price action is an opportune time to buy this innovative tech stock; the question is, how low can it go before bottoming? 

JFrog had a Strong Quarter: Guidance is Tepid

JFrog had a strong quarter in Q1, producing $100.3 million in revenue for a gain of 25.7%. The top line beat the consensus estimate by 170 basis points and is compounded by a wider margin. Cloud services grew by 47% to 37% of the total, up 600 basis points from last year on increasing client usage. The beat is significant because of the high bar set by analysts; all revisions in the last 30 days were upward. Enterprise+ subscriptions, the company’s end-to-end package, grew by 40% to 49% of the take. Net retention rate, a measure of client penetration, came in at 118%. 

The highlight of the report is the margin. The company widened margins significantly, reporting a 79.5% gross margin, 85.1% adjusted, and a 14% adjusted operating margin, up nearly 1000 bps YOY. The net result is adjusted EPS of $0.16, up a dime compared to last year despite a higher share count. Adjusted EPS beat the Marketbeat.com consensus by $0.02, suggesting the guidance may be cautious. 

The company's guidance plays into the decline in stock price. The guidance was raised at the top and bottom line but forecasts additional slowing and aligns with the consensus. The opportunity for investors is that this company shows momentum and will likely outperform and raise guidance as the year progresses. In this light, the 12% stock price decline is a knee-jerk reaction to news that has reset the market and positioned it for a solid rebound. 

Analysts See a Double-Digit Leap for JFrog Stock

The first two analyst revisions to pop up following the release include price target reductions, but that is the worst that can be said. The reductions come from Morgan Stanley and Needham to $47 and $45, both above the consensus. The consensus has been trending higher; that trend may be over, but it is up 60% YOY, showing a high level of conviction among analysts and 20% above the current action. Analysts' consensus aligns with the recent highs and may cap gains until later in the year. 

The technical action is mixed. The post-release plunge is concerning but has not crossed critical support targets and aligns with a larger reversal pattern. JFrog stock hit bottom in 2022, confirmed it in 2023, and began to rally higher later that year. Now, it is pulling back from a higher high to confirm support at a higher low possibly. The support target near $35 is a significant pivot point if confirmed. In that scenario, the market should begin to rebound soon and may retest the recent highs by mid-summer. If not, JFrog could fall to a new low and continue lower to the next target for support near $30.