Why JFrog Rallied Over 25%, Even on a Bad Day for the Nasdaq

Shares of software supply chain platform JFrog (NASDAQ: FROG) rallied 26.6% on Friday as of 3:35 p.m. ET, despite the overall Nasdaq Composite (NASDAQINDEX: ^IXIC) falling around 0.5% around that time.

JFrog delivered earnings last night that trounced expectations while also raising full-year guidance. As such, it's no surprise to see the stock hopping higher to close out the week.

A flawless print for JFrog amid AI fears

The software-as-a-service (SaaS) sector has been bifurcating recently, as the advent of generative AI is both a potential competitive threat but also a potential opportunity. For JFrog, it appears to be the latter thus far.

In the third quarter, revenue surged 25.5% to $136.9 million, with adjusted non-GAAP (generally accepted accounting principles) earnings per share surging 46.7% to $0.22. Both figures handily beat expectations.

Digging into the makeup of the quarter, more granular metrics were also positive. Cloud revenues surged 50% to $63.4 million, making up nearly half of revenue. The net dollar retention rate, which measures how much more existing customers spent this quarter versus the year-ago quarter, rose 118%. All that was a positive, showing that existing customers continue to buy more of JFrog's offerings, while the newer cloud-based product platform is gaining traction.

Management also raised full-year guidance to a revenue range of $523 million to $525 million, up from the prior guidance of $507 million to $510 million, with adjusted EPS of $0.78 to $0.80, up from the prior range of $0.68 to $0.70 given last quarter.

CEO Shlomi Ben Haim noted, "Our Q3 results highlight strong execution across DevOps, DevSecOps, and MLOps, as we continue to expand into Governance and Compliance, innovating and automating in the evolving domain of 'DevGovOps.'"

Image source: Getty Images.

JFrog isn't cheap, but isn't egregiously valued for a high-performing software stock

After today's surge, JFrog trades a little over 13 times sales. That's not cheap, but if management can continue growing the cloud business at high rates, JFrog's growth could potentially sustain or even accelerate as cloud makes up a larger and larger part of the business. The company also has about $650 million in cash and no debt, good for almost 10% of the company's market cap.

It may be a bit late to buy JFrog today, given the stock's big leap, but as we've seen with some software companies like Palantir, software names that can harness generative AI into productive use cases have been successful at accelerating growth. So, put JFrog on a watch list of software candidates to potentially buy if the stock pulls back.

Billy Duberstein and/or his clients has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends JFrog. The Motley Fool has a disclosure policy.