Snowflake (SNOW -4.15%) and JFrog (FROG -2.98%) were two of the hottest initial public offerings (IPOs) in the software sector for 2020. Both companies went public in September of that year, but they both burned investors who chased their initial rallies.
Snowflake went public at $120 per share and opened at $245. It went on to hit an all-time high of $401.89 last November -- but it now trades in the low $220s. JFrog listed its shares at $44, and the stock started trading at $71.27 before reaching its all-time high of $86.35 later that month. It now trades at about $25 -- more than 40% below its IPO price.
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Both stocks lost their momentum for similar reasons. Their initial valuations were too high, their growth decelerated, and they remained deeply unprofitable on the basis of generally accepted accounting principles (GAAP). Rising interest rates and other macro challenges, which sparked a retreat from pricier and unprofitable growth stocks, exacerbated that pressure. But is either beaten-down growth stock worth buying right now?
A pair of silo-busting disruptors
Snowflake and JFrog's software platforms are very different, but they both break down inefficient "silos" across large organizations.
Snowflake's cloud-based data warehouse gathers data from a wide range of computing platforms and applications and then aggregates those results in a centralized location so they can be accessed by third-party software. For example, Salesforce's Tableau 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 operating efficiency by automating tasks and keeping everyone on the same page.
How fast is Snowflake growing?
Snowflake's revenue surged 124% to $592 million in fiscal 2021, which ended last January, and grew 106% to $1.22 billion in fiscal 2022.
It ended the year with 5,944 customers, up 44% from a year earlier. Its total number of larger customers who generate more than $1 million in trailing 12-month product revenue also jumped 139% to 184. Its net revenue retention rate, which gauges its year-over-year growth per existing customer, improved by 10 percentage points to 178%.
For fiscal 2023, it expects its product revenue (which accounts for most its top line) to rise 65%-67%. Analysts expect its total revenue to increase 66% to $2.08 billion for the year and then grow 54% to $3.12 billion in 2024. Over the long term, Snowflake expects its annual product revenues to surge from $1.14 billion in fiscal 2022 to $10 billion in fiscal 2029, which would represent a compound annual growth rate (CAGR) of 36.4%.
Those growth rates are impressive, but Snowflake only expects its adjusted gross margin -- which expanded five percentage points to 74% in fiscal 2022 -- to rise 50 basis points to 74.5% in fiscal 2023. Its adjusted operating margin remains negative, and it's still unprofitable by GAAP and non-GAAP measures.
How fast is JFrog growing?
JFrog's revenue grew 44% to $151 million in fiscal 2020 and then rose 37% to $207 million in 2021. It anticipates around 32% growth in 2022.
JFrog served 6,650 enterprise customers at the end of 2021, representing 10% growth from a year earlier. Its total number of customers generating more than $100,000 in annual recurring revenue grew 53% to 537. It ended the year with a trailing 12-month net dollar retention rate of 130%, which represented a slight dip from 133% at the end of 2020.
JFrog's adjusted gross margin rose 170 basis points to 84.1% in 2021. Unlike Snowflake, JFrog maintained a positive adjusted operating margin over the past two years -- but that metric plunged from 8.6% in 2020 to 2% in 2021 as it acquired two smaller companies, Vdoo and Upswift.
The company expects that to reduce its adjusted operating margin and non-GAAP earnings to roughly breakeven levels in 2022. It will also probably remain deeply unprofitable on a GAAP basis.
JFrog didn't provide any longer-term forecasts like Snowflake, but analysts expect its revenue to grow 33% this year and 28% next year.
The valuations and verdict
Snowflake's stock has dropped below its opening price, but it remains far above its IPO price and still trades at 36 times this year's sales. JFrog, which remains far below its IPO price, trades at just nine times this year's sales.
I'm not a big fan of either stock right now, since rising interest rates and other macro headwinds are likely to cause investors to focus on their red ink instead of their impressive top-line growth. But if I had to pick one over the other, I'd stick with JFrog because its growth and valuations seem more stable and its margin should improve after it integrates its recent acquisitions.
