Snowflake (SNOW 2.53%) and JFrog (FROG 1.69%), which both started trading on Sept. 16, dazzled investors with their big post-IPO gains.
Snowflake, which was initially priced at $120 a share, raised $3.4 billion to become the biggest software IPO ever. Its stock more than doubled on the first day. JFrog, which was priced at $44 a share, raised $352 million and leapt nearly 50% in its first trading session.
Both companies' IPO investors are now sitting on some big gains, but is it too late for new investors to hop on board? Let's take a closer look at these two companies, why they attracted the bulls, and whether or not they still have room to run.
Image source: Getty Images.
How do Snowflake and JFrog make money?
Both Snowflake and JFrog offer software services that break down silos across large organizations.
Snowflake's service pulls all of a company's data onto a central cloud-based platform, where it can be easily analyzed and fed into a third-party visualization service like salesforce.com's Tableau. This approach is easier to scale than on-premise solutions, and requires "near-zero" maintenance.
JFrog's main product, Artifactory, stores software updates on a universal platform that can be accessed by any type of computing architecture. Many companies currently install software updates individually for each architecture -- such as microservices, containers, and cloud environments -- but Artifactory updates all of those platforms simultaneously.
Snowflake and JFrog's platforms are gaining a lot of attention for their ability to cut costs, save time, and streamline a company's operations. Nearly 30% of the Fortune 500 companies already use Snowflake's services, while about 75% of those companies are signed up with JFrog.
Which company is growing faster?
Snowflake's revenue surged 174% to $264.7 million in fiscal 2020 and grew another 133% year-over-year to $242 million in the first half of fiscal 2021.
Its total number of customers more than doubled year-over-year to 3,117 at the end of July. Its net retention rate, which gauges its ability to retain old customers, gain new ones, and cross-sell services, hit 158% in the first half of 2020. A net retention rate of 100% is already sticky, so Snowflake is clearly locking in its customers.
JFrog's revenue rose 65% year over year to $104.7 million last year, and it grew 50% year over year to $69.3 million in the first half of 2020. It served 5,800 organizations at the end of June, up from 5,600 organizations at the end of 2019, and it achieved a net retention rate of 139% over the past 12 months.
Both companies face similar challenges
Snowflake and JFrog both generate robust revenue growth, but neither company is profitable yet. Snowflake's net loss widened from $178 million in fiscal 2019 to $348.5 million in 2020. In the first half of fiscal 2021, its net loss narrowed slightly year over year from $177.2 million to $171.3 million.
Image source: Getty Images.
JFrog's net loss narrowed from $26 million in fiscal 2018 to $5.4 million in 2019. In the first six months of 2020, its net loss narrowed year over year again, going from $2.1 million to just $0.4 million.
But in its S-1 filing, JFrog warns that its "operating expenses will increase substantially in the foreseeable future" as it develops new products, ramps up its marketing efforts, and expands its customer base.
Snowflake and JFrog also both face potential competition from bigger tech companies. Snowflake mainly runs on top of Amazon (AMZN -1.64%) and Microsoft's (MSFT 0.37%) public cloud platforms, but both companies also bundle comparable services (Redshift and Azure SQL Data Warehouse, respectively) into their platforms.
JFrog enjoys an early mover's advantage in the "universal repository" space, but Amazon, Microsoft, IBM's Red Hat, and other cloud-oriented companies also offer similar solutions for software upgrades. If push comes to shove, these larger companies could eventually undercut Snowflake and JFrog to pull away their customers.
Nosebleed valuations
As of this writing, Snowflake is valued at $65.3 billion and JFrog is valued at $6.9 billion -- which are nosebleed valuations for both companies.
Snowflake is now being valued at 246 times last year's sales. If it grows its revenue 130% to $610 million this year, it would still be valued at 107 times that estimate. JFrog is valued at 66 times last year's sales. If it grows its revenue 50% to $157 million in 2020, it would be valued at 44 times this year's sales -- which is still pricier than many of the market's frothiest tech stocks.
The winner: JFrog
I'm not in a hurry to chase either hot IPO right now. But if I had to choose one over the other, I'd stick with JFrog. It's growing at a slower rate than Snowflake, but it's closer to profitability and its stock is trading at a lower valuation. Snowflake is still worth watching, but it's trading at cult-like levels, and could face formidable competitors in the near future.
