Best Software Stock: Snowflake vs. JFrog
Snowflake (NYSE: SNOW) and JFrog (NASDAQ: FROG) were two of the hottest initial public offerings (IPOs) in the software industry for 2020. Both companies went public in September of that year, but they both burned investors chasing their initial rallies.
Snowflake went public at $120 per share and opened at $245. It hit an all-time high of $401.89 last November – but is now trading in the low $220s. JFrog listed its shares at $44 and the stock began trading at $71.27 before hitting its all-time high of $86.35 later that month. It is now trading at around $25, more than 40% below its IPO price.
Both stocks lost momentum for similar reasons. Their initial valuations were too high, their growth slowed, and they remained deeply unprofitable based on generally accepted accounting principles (GAAP). Rising interest rates and other macroeconomic challenges, which caused a pullback from more expensive and unprofitable growth stocks, exacerbated this pressure. But are either battered growth stocks worth buying right now?
A pair of anti-silo disruptors
Snowflake’s and JFrog’s software platforms are very different, but they both break down inefficient “silos” in large organizations.
Snowflake cloud-based The data warehouse gathers data from a wide range of computer platforms and applications, then aggregates these results in a centralized location so that they can be accessed by third-party software. For example, Selling powerTableau can connect to Snowflake and create easy-to-read graphs and charts with an organization’s data.
JFrog’s Artifactory platform is a universal repository for software updates, which it automatically delivers to a wide range of computing platforms. This approach eliminates the need to manually install software updates, which can be time-consuming, buggy, and prone to human error. Artifactory’s Xray feature can also scan a company’s software for security vulnerabilities.
Both of these platforms improve an organization’s operational efficiency by automating tasks and keeping everyone on the same page.
How fast is Snowflake growing?
Snowflake’s revenue jumped 124% to $592 million in fiscal 2021, which ended last January, and rose 106% to $1.22 billion in fiscal 2021. fiscal year 2022.
It ended the year with 5,944 customers, up 44% from the previous year. Its total number of larger customers who generate more than $1 million in product revenue over the last 12 months also jumped 139% to 184. Its net revenue retention rate, which measures its growth of a year-over-year per existing customer, improved by 10 percentage points. at 178%.
For fiscal 2023, it expects its product revenue (which accounts for the bulk of its revenue) to grow 65% to 67%. Analysts expect its total revenue to grow 66% to $2.08 billion for the year and then 54% to $3.12 billion in 2024. 2029, which would represent a rate compound annual growth rate (CAGR) of 36.4%.
These growth rates are impressivebut Snowflake only expects its adjusted gross margin — which rose five percentage points to 74% in fiscal 2022 — to rise 50 basis points to 74.5% in fiscal 2022. fiscal 2023. Its adjusted operating margin remains negative, and it is still not profitable under GAAP and non-GAAP measures.
How fast is JFrog growing?
JFrog’s revenue grew 44% to $151 million in fiscal 2020 and then 37% to $207 million in 2021. It expects growth of about 32% in 2022.
JFrog was serving 6,650 enterprise customers at the end of 2021, representing a 10% growth over the previous year. Its total number of customers generating more than $100,000 in annual recurring revenue increased 53% to 537. It ended the year with a 12-month net dollar retention rate of 130%, which is a slight down from 133% at the end of 2020. .
JFrog’s adjusted gross margin increased 170 basis points to 84.1% in 2021. Unlike Snowflake, JFrog has maintained a positive adjusted operating margin for the past two years, but this metric has fallen 8 .6% in 2020 to 2% in 2021, as it acquired two smaller companies, Vdoo and Upswift.
The company expects its adjusted operating margin and non-GAAP earnings to return to roughly break-even levels in 2022. It will also likely remain deeply unprofitable on a GAAP basis.
JFrog didn’t provide longer-term forecasts like Snowflake, but analysts expect its revenue to grow 33% this year and 28% next year.
The evaluations and the verdict
Snowflake’s stock has fallen below its opening price, but it remains well above its IPO price and is still trading at 36 times this year’s sales. JFrog, which remains well below its IPO price, is trading at just nine times this year’s sales.
I’m not a huge fan of either stock right now as rising interest rates and other macro headwinds will likely cause investors to focus on their red ink rather than their impressive revenue growth. But if I had to choose one over the other, I would stick with JFrog as its growth and valuations seem more stable and its margin should improve after integrating its recent acquisitions.
10 stocks we like better than Snowflake
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now… and Snowflake was not one of them! That’s right – they think these 10 stocks are even better buys.
* Equity Advisor Returns as of March 3, 2022
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.