AI Code Expansion Will Eventually Pressure Cloud Usage And Security Upside

Catalysts

About JFrog

JFrog provides a platform for managing, securing and governing software binaries and related artifacts across the software supply chain.

What are the underlying business or industry changes driving this perspective?

• The rapid increase in AI generated code and binaries can encourage customers to run materially above current cloud commitments for longer than expected. This may later push them to tighten usage or renegotiate pricing, pressuring JFrog's cloud revenue growth rates and limiting expansion in annual recurring revenue.
• As large AI labs and model providers add more native binary scanning, reverse engineering and governance features, JFrog risks being pushed toward lower value infrastructure roles. This could compress pricing power over time and weigh on long term gross margins and earnings.
• If enterprises consolidate AI development stacks around a few leading platforms that bundle artifact management and security, JFrog may face slower new logo additions and smaller upsell opportunities. This could affect future revenue growth and net dollar retention.
• Heavy customer experimentation with multiple AI agents and MCP servers today may normalize once organizations standardize toolchains and impose stricter budget discipline. This could reduce usage based overages and temper growth in cloud revenue and free cash flow.
• Persistent software supply chain attacks can drive near term demand for products like Curation. However, if customers increasingly rely on broader security suites or platform level controls, JFrog's attach rates for security offerings could stall, limiting upside to net margins and earnings from higher value security driven subscriptions.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on JFrog compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming JFrog's revenue will grow by 16.9% annually over the next 3 years.
• The bearish analysts are not forecasting that JFrog will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate JFrog's profit margin will increase from -10.9% to the average US Software industry of 12.0% in 3 years.
• If JFrog's profit margin were to converge on the industry average, you could expect earnings to reach $108.1 million (and earnings per share of $0.8) by about July 2029, up from -$61.6 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 106.3x on those 2029 earnings, up from -157.7x today. This future PE is greater than the current PE for the US Software industry at 27.8x.
• The bearish analysts expect the number of shares outstanding to grow by 3.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• JFrog is reporting total quarterly revenue of US$154 million with 26% year over year growth and cloud revenue growth of 50%. If this pace of adoption in cloud and security subscriptions persists for several years rather than fading, it could support higher revenue and earnings than a bearish scenario assumes, potentially supporting the share price.
• Cloud revenue already represents 51% of total revenue and management has increased its baseline cloud growth outlook to 33% to 35% for 2026. If customers keep converting usage above commitments into larger multiyear cloud contracts, recurring revenue and cash flow visibility could strengthen and help support higher net margins over time.
• Security products such as JFrog Curation, Xray and Advanced Security are being adopted in response to frequent software supply chain attacks. If this security demand remains durable as AI and open source usage expand, high value security driven subscriptions could support both revenue growth and net margins more than a bearish view allows for.
• JFrog reports net dollar retention of 120% and gross retention of 97%, along with 36% growth in remaining performance obligations to US$574.9 million. If these long term customer and contract trends continue, they could underpin steady growth in revenue and earnings despite concerns about future pricing pressure.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for JFrog is $66.46, which represents up to two standard deviations below the consensus price target of $90.52. This valuation is based on what can be assumed as the expectations of JFrog's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $65.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $900.1 million, earnings will come to $108.1 million, and it would be trading on a PE ratio of 106.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of $80.16, the analyst price target of $66.46 is 20.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.