GitLab Q4 Earnings: Not Buying The Growth At All Cost Narrative (NASDAQ:GTLB)

Funding Thesis

GitLab (NASDAQ:GTLB) was a high-profile IPO again in 2021, elevating over $800 million at a valuation of $11 billion. Nonetheless, the corporate’s share worth has slumped over 60% since going public attributable to rising charges, hovering inflation, and risk-off sentiment. GitLab operates within the massive and fast-growing DevSecOps (improvement, safety, and operations) house that continues to realize robust traction because of digital transformation. That is mirrored in its newest earnings as income progress stays strong. Nonetheless, the underside line and steerage are an enormous downside. The corporate’s working loss continues to widen with no profitability in sight, whereas steerage signifies a big slowdown in progress attributable to macro headwinds. Its present valuation can be close to the very best among the many high-growth SaaS (subscription as a service) house. Subsequently, I price GitLab inventory as a promote.

Why GitLab?

GitLab is an all-in-one DevSecOps platform that gives instruments to assist groups collaborate and construct software program. It covers the entire software program supply course of from planning, creating, monitoring, to governing. From the chart beneath, you’ll be able to see that the corporate provides a number of instruments throughout the entire supply lifecycle. Its platform provides a number of advantages. It permits higher collaboration because it unites developer, safety, and ops groups in a single workflow. This additionally interprets to sooner software program supply time as adjustments will be finished faster. It additionally offers groups higher perception into the entire software program supply course of. In keeping with the corporate, it delivers an ROI of 427% with a payback interval of fewer than 6 months. GitLab is presently utilized by blue-chip clients comparable to NVIDIA (NVDA), T-Cellular (TMUS), and Lockheed Martin (LMT).

Sid Sijbrandij, CEO, on the shift to DevSecOps

Each firm must be nice at creating, securing and working software program or they are going to be disrupted. They’re more and more turning to DevSecOps as a central pillar of their software program innovation technique. We see a shift from a legacy method the place IT managers sew collectively a patchwork of homegrown and third-party instruments. Whereas a few of these instruments could also be best-in-class, the market is clearly transferring away from level options in the direction of a single utility, a platform for the whole software program supply lifecycle.

In keeping with Grand View Analysis, the TAM of DevSecOps is predicted to develop from simply $3.79 billion in 2021 to $17.24 billion in 2028, representing a CAGR (compounded annual progress price) of 24.1%. GitLab themselves are much more optimistic and estimates its TAM to be $40 billion. There are a number of catalysts driving the growth which embody greater demand for sooner software program supply, growing want for safety, and consolidation of toolchains. In keeping with GitLab, 69% of corporations wish to consolidate their toolchains.

This autumn Earnings

GitLab’s newest earnings outcomes proceed to display exponential progress, however the loss is widening and steerage can be weak. I don’t assume this growth-at-all-cost technique can be sustainable in the long term.

The corporate reported income of $122.9 million, up 58% YoY (yr over yr) in comparison with $77.8 million. Gross revenue was up 58.5% YoY from $68.6 million to $108.7 million, whereas the gross margin remained flat at 88%. Income progress was pushed by a powerful improve in new clients and better spending from present clients. Clients with greater than $100,000 in ARR (annual recurring income) have been up 42% from 492 to 697. Whereas clients with an ARR of no less than $5,000 elevated 52% from 4,593 to 7,002. The dollar-based internet retention price for the quarter was 133%, as clients proceed to undertake extra merchandise or shift to greater tiers.

The highest line was robust however the backside line continued to wrestle. Regardless of income being up 58%, the web loss confirmed no enchancment. Working bills have been $154.9 million in comparison with $109.2 million, up 41.8% YoY. S&M (gross sales and advertising) bills have been up 42.5% from $57.2 million to $81.5 million. R&D (analysis and improvement) bills have been up 52.8% from $28.6 million to $43.7 million. S&M bills alone accounted for 66.3% of income. This resulted within the working loss additional widening by 14% from $(40.6) million to $(46.3) million, or (37.7)% of income.

The steerage for FY24 was additionally extraordinarily weak. It expects income to be between $529 million to $533 million, considerably decrease than the $587 million consensus. This represents a progress of simply 25.1% on the midpoint which point out an enormous deceleration from the prior yr. I don’t just like the outcomes as profitability is trending within the unsuitable path whereas steerage signifies slowing progress. I hope the administration group could have extra self-discipline on spending and present some working leverage within the coming quarters.

Traders Takeaway

GitLab has nice merchandise and the DevSecOps business ought to proceed to increase quickly because of the growing want for a quick tempo of innovation and operational efficiencies. Nonetheless, profitability and valuation are two enormous points. The working loss continues to worsen and no working leverage is being proven. The corporate is reporting exponential progress charges however that is solely as a result of it retains growing the spending on S&M and R&D.

The present valuation can be very costly. It’s buying and selling at an fwd EV/gross sales ratio of 9.8x which is greater than most high-growth SaaS corporations (I’m utilizing the EV/gross sales ratio as the corporate will not be worthwhile). As an illustration, CrowdStrike (CRWD) and BILL (BILL) are buying and selling at an fwd EV/gross sales ratio of 8.9x and 6.9x respectively, and are a lot nearer to profitability. I do not imagine Gitlab is well worth the premium because the steerage additionally signifies a big slowdown in progress. Will probably be dangerous to personal GitLab as we may even see a downward revision in multiples towards friends’ ranges. I price the corporate as a promote.