2023-03-16 09:07:36 ET
Summary
- GitLab reported solid revenue growth and operating losses similar to the year ago period.
- Despite what seemed like a decent quarter, the stock sold off sharply after the report.
- Investors may be turned off by management's Q1 and full year guidance.
- GTLB stock remains richly valued even after the selloff.
- We view GitLab as being a difficult stock to own in this environment.
Thesis
GitLab ( GTLB ) reported solid fourth quarter results , yet the stock sold off sharply after the report. Investors may not have liked management's Q1 and full year guidance. Due to their rich valuation we view GitLab as being a difficult stock to own in this environment.
Decent Operating Results
For the fourth quarter GitLab reported revenue growth of 58% year over year, but growing operating losses. While this rate of revenue growth is certainly high, in this risk-off market environment investors are demanding profitability over growth. This growth in operating losses is likely part of what caused GitLab's post earnings decline.
GitLab's Q4 Earnings Press Release
These are some "Fourth Quarter Fiscal Year 2023 Business Highlights" that GitLab listed in their earnings press release .
Customers with more than $5,000 of ARR increased to 7,002, up 52% from Q4 of fiscal year 2022.Customers with more than $100,000 of ARR increased to 697, up 42% from Q4 of fiscal year 2022.Customers with more than $1 million of ARR increased to 63, up 62% from Q4 of fiscal year 2022.Dollar-Based Net Retention Rate was 133% in Q4 of fiscal year 2023.Announced the limited availability of GitLab Dedicated, a single-tenant SaaS solution for organizations in highly regulated industries and have complex compliance and security requirements. Announced beta availability of Value Streams Dashboard, a new way for all DevSecOps stakeholders to have visibility into value stream metrics. Announced beta availability of GitLab Remote Development, enabling organizations to let developers establish an environment that best suits their needs, including where, when, and how they prefer to work. Announced GitLab Premium price increase from $19 to $29 per user per month effective April 3, 2023.Announced the expansion of the GitLab for Startups program. Appointed Mark Porter, Chief Technology Officer at MongoDB, Inc., to GitLab's Board of Directors. Received a SOC 2 Type 1 report for GitLab Dedicated, which includes Security and Confidentiality criterion. Expanded SOC 2 Type 2 report for GitLab.com to include the Availability Criteria. Won CRN's Tech Innovator Awards in the Application Development and DevOps category for GitLab 15.
GitLab was able to break 7,000 base customers in the quarter, which shows the value that their solutions have to many different businesses. This distributed customer base reduces concentration risk. Their dollar based net retention rate of 133% is pretty high for software, or any business for that matter. GitLab is able to effectively "land and expand", and their customers are given a good reason to spend even more money with them.
GitLab's Q4 Earnings Presentation
GitLab has been able to show consistently high rates of revenue growth despite the difficulties the world economy has faced over the past year. The market has been willing to assume that this growth rate will continue, and if it doesn't investors can expect the multiple given to GitLab's stock to massively decrease.
GitLab's Q4 Earnings Presentation
GitLab's base customer count and >100k ARR customer count are both increasing. This shows that GitLab is able to not only continue to add new customers, they are also able to generate enough value for their existing customers that they decide to spend more money with them over time.
GitLab's Q4 Earnings Presentation
Operating expenses continue to decline as a percentage of revenue. While this improvement is good to see, there is still much work to be done in regards to achieving profitability. Investors will likely continue to demand more progress on realizing operating efficiencies going forward.
GitLab's Q4 Earnings Presentation GitLab's Q4 Earnings Presentation
GitLab talks about their many tailwinds, but ultimately these tailwinds will need to translate into a meaningful improvement in business fundamentals.
GitLab's Q4 Earnings Presentation
Q1 and Full Year Guidance
Despite continued momentum in GitLab's business, investors appear to dislike the fiscal Q1 and fiscal 2024 guidance given by management. In a market that is seemingly becoming more risk-off by the day, GitLab guiding for continued non-GAAP operating losses is unacceptable in this market environment, especially given that their GAAP operating losses will likely be much higher.
GitLab's Q4 Earnings Press Release
This poor guidance is made even worse because of the premium valuation that the market has given GitLab, which the company is seemingly unable to justify.
Valuation
Since GitLab doesn't have positive earnings or positive operating cash flow or positive EBITDA, investors are forced to use metrics such as price to sales. On this front GitLab looks attractive relative to their recent history, but still remains expensive at over 11 times sales. This rich valuation multiple is likely why the stock got punished so much after earnings, and why their guidance was insufficient to sustain the lofty multiple.
Book value is a bit difficult to assess given how much of their assets are not on balance sheet, but on this front GitLab appears to be reasonably valued.
One thing going for GitLab is their $936 million in cash and short term investments and no debt. Their clean balance sheet could make them an attractive acquisition target, but in this regulatory environment I wouldn't count on it.
Price Action
GitLab has seen a precipitous decline since their IPO, but we do not view this as an opportunity to buy the dip. Investors can wait on the sidelines for the price to decline further or for their fundamentals to improve.
Risks
Upside risks include GitLab's ability to make their operations profitable and/or increase their top line growth rate. Either of these developments would improve the fundamental picture and could cause GitLab's stock to reverse its downward spiral.
Downside risks include GitLab's tough competition in GitHub and potential side effects of the failure of SVB. GitHub is difficult to compute with because Microsoft can effectively subsidize the business forever. GitLab will need to provide far superior solutions to GitHub or they will likely lose market share because of Microsoft's ability to bundle GitHub services with other offerings and better compete on price. The failure of SVB means that there will be less funding available for startups and early stage tech firms, both of which are potential clients for GitLab. This could reduce the long-term revenue of GitLab, and consequently reduce their present value.
We view the risk/reward as being unfavorable, but if the situation changes we would take another look. We would be looking for a dramatic improvement in fundamentals or a much lower stock price before thinking about buying.
Key Takeaway
GitLab's valuation is too high given their fundamental prospects. We believe that investors should wait on the sidelines until there is a meaningful improvement in fundamentals or the stock price declines much further.
For further details see:
GitLab: Decent Quarter And Poor Outlook, Still Overvalued