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GitLab is now profitable and investors are cheering

Although the markets have steadily risen this year, some stocks have been on a roller coaster ride. Just take a look at GitLab ($GTLB). The shares of the leading DevSecOps platform reached all-time lows back in May, but they’ve rallied over 100% since then.

The main reason behind this stellar turnaround is the company’s continued rapid growth coupled with significant improvement in the bottom line. GitLab is now a profitable, and self-sufficient company with strong and sustainable growth rates. AI is also benefiting GTLB, which can lead to even higher prices in the short, mid, and long run. Let’s take a deeper dive.

Uniting Developer, Security, & Operations Teams

GitLab stands at the forefront of the DevSecOps movement, providing a comprehensive suite for Developers, Security, and Operations teams to collaborate seamlessly. It’s a key player in shaping the future of code development.

As of Q3, GitLab boasts 8,175 customers, up 26% y/y, and has a user base, of over 30 million. This places GitLab as the second most popular DevSecOps platform, trailing only behind Microsoft-owned GitHub, which claims an estimated user base of over 80 million.

GitLab's ascent in the DevSecOps realm can be attributed to its holistic approach to the software development lifecycle. The platform offers an end-to-end solution, encompassing everything from project planning and source code management to continuous integration, deployment, and monitoring. This all-encompassing ecosystem empowers development teams to streamline their workflows, fostering collaboration and accelerating time-to-market.

The company’s growth momentum remains strong even in the current economic backdrop, due to its continued innovation that makes its platform more valuable over time. GitLab has leveraged AI to introduce AI-powered features and boost its customers’ productivity. For instance, earlier this year, the company launched GitLab Duo, a suite of AI capabilities that power GitLab's DevSecOps platform. It’s designed to help developers, security professionals, and operations teams work together more effectively and efficiently to deliver high-quality software.

GitLab Duo offers a range of features, including code suggestions, AI-powered detection of security vulnerabilities in code, and other features. By using AI to automate tasks, suggest improvements, and identify potential issues, GitLab Duo can help teams to be more productive, efficient, and secure. While it’s still in its early stages of development, the company has received positive feedback from high-profile customers like Nasdaq. Also, the adoption trends suggest that there’s a strong demand for this AI suite. Duo is not a separate offering but is offered as part of the Ultimate tier, which costs $99 per month. In the most recent quarter, this tier accounted for more than half of the quarterly ARR bookings, showing that many customers opted for the most expensive plan to get access to the AI features.

During the quarter GitLab launched another new product, Enterprise Agile Planning, which is a product development add-on that helps development teams to plan, prioritize, and track their work. With this product, GitLab is targeting Jira customers who are evaluating alternatives after Atlassian's end of support for their server product. While it’s included in the Ultimate plan, it’s also a separate product that can be used by a non-engineering audience. This product further increases GitLab’s addressable market and makes its platform more comprehensive.

Lengthening Sales Cycles Haven’t Significantly Impacted Financial Performance

GitLab hasn’t been completely immune to the macro disruptions. In Q3, sales cycles lengthened primarily in the mid-market and SMB segments due to cautious customer behavior in the current uncertain macro environment. However, the significant increase in spending from large customers more than offset the weakness in the lower segments. The Q3 NRR came in at 128%, which is a very strong rate, highlighting the rapidly increasing spending of existing customers. This was primarily driven by customers with an ARR of over $100,000 that increased 37% y/y in Q3 to 874, leading to total revenue growth of 32% y/y to $150 million, which easily beat analyst estimates.

GitLab has significant growth potential both from new and existing customers. It operates in the large and rapidly growing DevSecOps market, meaning that it can continue to rapidly grow its customer base for the foreseeable future. On top of that, the new add-on features increase the upselling and cross-selling potential for existing customers, resulting in rapid and increasingly efficient growth. The 7% y/y increase in sales and marketing (S&M) expenses in Q3 confirms the efficiency of its growth strategy.

Given that S&M accounts for half of the total operating expenses, the marketing leverage during the quarter led to a total operating leverage. The Q3 operating margin improved significantly to -27% from -50% in the year-ago quarter. And if we exclude stock-based expenses, the company delivered its first positive adjusted operating margin of 3%, versus an adjusted operating margin of -19% a year ago. As you can see, the bottom line improvement has been solid over the past twelve months, underscoring the success of GitLab’s growth strategy.

What About Valuation

GitLab is trading at premium valuation multiples, due to its strong top and bottom line performance. At current prices of around $61 per share, it trades at a PS ratio of 17.8x, which is considered a premium multiple. However, this multiple is justified by the company’s solid operating performance amid a challenging global macro.

Assuming interest rates start to come down in 2024 and the PS multiple rises to 20x, and based on projected 2024 revenues of $736 million, $GTLB stock can rise 55% from current prices and reach $94.

What Else

GitLab is a high-quality SaaS company that operates in a large and growing market. The consolidation trend from multiple-point solutions to DevOps platforms benefits the company that offers the most comprehensive AI-powered DevSecOps platform. Also, the increasing adoption of AI is another powerful trend that will make software development easier, and the overall consumption and the number of people involved in the sector will probably increase, resulting in increasing demand for GitLab’s platform. The stock may be premium priced but this is justified by the stellar top and bottom line performance.

GITLAB RATING

Short Term: Buy

Long Term: Buy

🎯 FY2024 Price Target: $94

I’ve no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.