Despite some heavy selling pressures early last week, the market rallied to close the week following Nvidia’s (NVDA) blowout earnings report that highlighted the growth potential of AI. By week’s end the S&P 500 had gained 1.2%, while the Dow rose marginally and the Nasdaq fell slightly.
The Stock – JFrog (FROG)
Why the Strength
A rundown of JFrog’s software applications is a dive into byzantine IT terminology, with the company providing services like DevOps, DevSecOps, MLOps and MLSecOps for clients focused on “the binary” and “artifactory” uses. What’s more important to grasp is that JFrog specializes in software development systems that can span the whole of a client’s enterprise and help build secure and increasingly interoperable applications.
A driving force is that IT heads at large businesses want to move their operations to having one single source of records, compared to today where many different software development and security systems often each have their own siloed data, which makes it a slog to figure out what’s up when something goes awry. Basically, clients use JFrog’s software to build more secure software while providing better visibility into the operations as a whole.
For example, the company recently inked AT&T as a client to become its single source of records and provide application security. AT&T has tens of thousands of individual developers working for its business; using JFrog will allow the company to wrangle them to both ensure data security and give the visibility its tech chiefs need to decide how to evolve the firm’s technology offerings.
Providing such services is a booming business: JFrog’s revenue grew 25% in 2023, to $350 million, with 51 cents per share of earnings, up from 4 cents in 2022. Much of the growth comes as businesses decide they need to move to the cloud and elect to shift a lot of internal management to JFrog. That trend should raise Q1 sales about 23% to $99 million, says management, with full-year revenue seen coming in around $426 million (up 22%) with earnings per share of $0.60.
Technical Analysis
FROG came public in late 2020 and basically skied downhill from the jump, falling from 95 to 16 by mid-2022—and while that was technically the bottom, shares really never got much going on the upside (though last spring/early summer was encouraging), with the stock still sitting at 21 last October. But like most growth titles, FROG changed character after that, lifting to two-year highs by December, resting for a while as the 10-week line caught up, and then surging before and after earnings the past two weeks. Stop — 36
The Covered Call Trade
Buy JFrog (FROG) Stock at 44.50, Sell to Open April 45 Strike Calls (exp. 4/19) for $2.50, or a Net Price of 42 or less
Static Return: $250 per covered call (5.95%)
Breakeven: 42
Covered Call Return (if assigned): $300 per covered call (7.14%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 42 or less. (In this case 44.50 minus 2.50 = 42. Or another example is you could pay 44.35 for the stock and sell the call for 2.35, which also equals 42)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on March 5, 2024.
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