Software company GitLab (GTLB 0.54%) went public on Oct. 14 and was embraced by a market of optimistic investors that traded the stock up more than 30% on its opening day, closing at more than $100 per share.
Times have changed, the optimism has turned to wariness, and investors are shunning the stock, which trades at around $45 these days. Rampant inflation and rising rates have sent investors running for more defensive investments.
But GitLab's business is performing well, making a falling share price a potential opportunity for investors with a long-term mindset. Here's what makes GitLab a stock to consider buying today.
Image source: Getty Images.
GitLab's role in "DevOps"
DevOps is where software development comes together with IT operations. It aims to oversee and help organizations plan, build, test, and launch software as quickly, efficiently, and securely as possible. This isn't just for tech companies; software is becoming at least part of businesses across virtually every industry.
Traditionally, software development can be complicated. Building software programs often takes teams of people simultaneously working on different things. There are many moving parts, which can create errors or other breakdowns when you try to put everything together.
GitLab is essentially a DevOps platform that keeps everything on the "same page." It helps different people and teams collaborate throughout the lifecycle of software development. It uses open-source software called "git" and provides a unified interface to help these little code "pieces" fit together correctly.
Many game developers use a "game engine," turn-key software that they can use to create their games. GitLab is like the game engine for people making software programs. A basic version of the product is free of charge for individuals, while small businesses and enterprises pay a subscription fee for access and additional features.
Showing strong fundamentals
GitLab isn't the only DevOps show in town; it competes directly with market-leader Microsoft (MSFT 0.37%), which offers a product called "GitHub." Competing with a trillion-dollar company isn't ideal, but you wouldn't know it from GitLab's financials.
The company's revenue grew 69% year over year in the quarter ending Jan. 31, to $78 million, with $253 million in revenue over the past year. GitLab's net revenue retention rate is 152%, which signals that customers increase their spending once they become users. Management has also commented that its enterprise pricing tier, which supports large organizations, is its fastest-growing segment.
Based on this, it seems the software is infiltrating companies, where it eventually becomes "mission-critical," pushing customers up the pricing tiers over time. This is evidence of the value customers get from the product.
GitLab has 89% gross profit margins, and the company is entirely remote. However, the business isn't profitable yet due to high marketing spending, which was $190 million over the past year (75% of revenue). Investors will want to look for revenue to grow faster than marketing expenses moving forward, which would push the company toward turning a profit.
The stock's valuation is reasonable
Look across the technology sector and you'll spot stocks that traded at bloated valuations, and GitLab is no different. The stock peaked at a forward price-to-sales ratio of 30, but that's come down to just under 15.
GTLB PS Ratio (Forward) data by YCharts
Even if you don't consider the stock a "bargain" after its drop, it seemingly has a lot of room for growth. Research firm Allied Market Research estimates that the global DevOps market will rise from nearly $7 billion in 2020 to $58 billion by 2030, growing 24% per year. Remember, GitLab's revenue was $252 million over the past year.
Guessing whether GitLab's stock price will fall further in the short term is a fool's errand; anything's possible. That's why a long-term investment strategy can be helpful. You can build a position slowly over time, using a dollar-cost averaging method to avoid going "all in" at the worst time. Investors probably won't lose sleep over a few dollars in the share price if the company succeeds over the long term.
