1 High-Growth Cloud Stock That's Beating the Macro Headwinds

You don't have to look hard to find trouble in the cloud software sector these days. Nearly every software-as-a-service (SaaS) stock is down substantially from its peak last year, and many industry executives have said they are starting to see macro headwinds such as slowing growth and lengthening sales cycles (the time it takes to close a deal with a customer).

Despite those headwinds, one high-flying cloud stock breezed past its latest test in its second-quarter earnings report, beating estimates on the top and bottom lines. I'm talking about GitLab (GTLB 0.54%), a provider of a unified DevOps platform, helping its customers deploy software more quickly and efficiently, and with a better return on investment (ROI).

GitLab's revenue in the quarter jumped 74% to $101 million, ahead of estimates at $94 million. Margins improved as well -- its adjusted net loss narrowed from $26.1 million to $21.5 million, and it posted an adjusted loss per share of $0.15, better than analysts' expectations at $0.23.

Its gross margin is near the top of the industry at 89%, showing the company has the potential to be highly profitable at scale. It posted a net retention rate of greater than 130% over the last year, meaning existing customers are increasing their spending by at least 30% on average. Its guidance also called for top-line growth to accelerate to 78% in the current quarter, hitting $105 million to $106 million in revenue.

The stock jumped 14.3% on Sept. 7 after the report came out and has continued to rally since then. 

Why GitLab is bucking the software trend

GitLab offers its customers a way to save money and increase their ROI in software development, operations, and security. Its ability to deliver strong ROI has made it a winner during a difficult time in the software industry. Because GitLab is a single platform, customers can use it to replace several "point solutions" or individualized software solutions for things like code review and security.

In an interview with The Motley Fool, GitLab CFO Brian Robins explained his company's sales cycle actually decreased in the quarter even as most software companies are seeing the opposite happen. He attributes the accelerating sales cycle to GitLab's ability to streamline its customers' software operations and save them money compared to using point solutions. Forrester estimates GitLab can increase its customers' ROI by as much as 407%.  

The high growth rate also seems to be a testament to strong demand for the company's product, and it's growing into an addressable market worth $40 billion, of which it owns just 1% currently. Robins estimated 50% of GitLab's competition comes from in-house products, which should enable it to continue gaining market share. By 2024, 60% of organizations will have switched from multiple point solutions to single-delivery platforms, according to Gartner, adding another tailwind to the company's growth potential.

Robins said GitLab's biggest direct competitor is Microsoft's GitHub, against which it competes in 20% of sales pitches. But he said competing against GitHub hasn't had an impact on his company's win rates.

Is GitLab a buy?

GitLab went public last October just before the Nasdaq peaked and market sentiment shifted against high-growth tech stocks due to concerns about rising interest rates and fears of a recession. Because of that timing, the stock is still down more than 20% from its IPO price and more than 50% from the peak reached shortly after its market debut -- a disappointment for early investors. 

Even with the pullback, GitLab is still expensive based on traditional metrics. The stock trades at a price-to-sales ratio of 23, based on its trailing revenue. Nonetheless, the growth opportunity is appealing, especially based on its recent performance, including accelerating revenue growth in the current quarter and a shortening sales cycle. The company's market opportunity is evident, and the trend away from point solutions should give it a tailwind.

GitLab's valuation makes it a risky bet, especially in today's market. But for risk-tolerant investors, the upside potential justifies getting some exposure to what could be multibagger returns.