In this podcast, Motley Fool senior analyst Jim Gillies discusses:
- Why he believes the reaction on Wall Street to the latest CPI numbers could signal a bottom for stocks.
- How, after a "busted IPO, Bumble appears to be a real business trading at a more reasonable price.
Motley Fool contributor Jeremy Bowman talks with GitLab CFO Brian Robins about how his company is helping other companies develop software, and the trade-off between growth and profitability.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Nov. 11, 2022.
Chris Hill: You ever have one of those days when every traffic light you hit is green? It's like that only for investing. Motley Fool Money starts now. I'm Chris Hill. Joining me from the Great White North, Mr. Jim Gillies. Thanks for being here.
Jim Gillies: Thanks for the invite. It's not very white this morning. We're still in the last throes of autumn, where I am at least. the snow's common. It's already landed in Alberta, but here it's a very nice day, Chris.
Chris Hill: You know where else it's a nice day? On Wall Street.
Jim Gillies: I was going to say practically everywhere on Wall Street.
Chris Hill: It's a great day for investors because the consumer price index rose just 0.4 percent for the month, 7.7 percent for the past 12 months. Both those numbers lower than expected and investors are having a party, Jim. The S&P 500 is up four percent. The Nasdaq is up nearly six percent. We were chatting before we started recording. You think this could be a sign?
Jim Gillies: I absolutely think this could be a sign. Well, anything could be a sign, but yes, I do think this is a sign. This is what we are going to fly the risk on banner like it is here, because this is the first real hint that inflationary forces are starting to subside, that now what does that mean? Well, interest rate hikes have been doing what they are designed to do. Certainly, the quantitative tightening program is ongoing. I believe I'm not following along terribly closely, but I know I've been reading things that they're actually might be going too far on that. That's selling bonds into the market rather than buying them under quantitative easing.
But rates, if the thinking goes, if rates have indeed tamed inflation, then we won't need as many rate hikes going forward, which means the unrelenting pressure on stock valuations, stock prices, asset prices, and interest rates are inversely correlated, or discount rates when you're looking at stocks are inversely related. Lower rate hikes or even no rate hikes translates to no further stock price falls in aggregate as they can go. I can't speak for individual stocks and possibly a time for stocks to go up. This is being rejoiced. My take on it is these CPI is they really like to get revised. They revise them a month and three months later.
I'm not going to be the unfettered flying of the flag here, of the risk on flag. However, I think the takeaway is, if this CPI number is good, if everything looks indeed good then from a market perspective, real good chance to bottoms in. Now, that does not address the possibility of recession, although I've been in the skeptical camp of how recessionary are we going to get. There's been a lot of really good corporate earnings reports this quarter frankly. I know it doesn't seem that way sometimes because the ones that stink up a joint tend to get all the attention.
Chris Hill: I think it's fair to say that this earning season has been on the whole better than expected. I think there was a lot of fear/resignation going into this earnings season. Just like, OK, this is going to be terrible. Let's just get through this. There have been some nice surprises.
Jim Gillies: There have been a lot of nice surprises. The other thing is, I know it's like I'm generally not a macro guy. But that said, I guess we're dabbling a macro right now same as will throw it into the ether.
Chris Hill: Macro is the reason they're throwing a party on Wall Street. Yes, today, we're macro people.
Jim Gillies: It's real hard to have recessions with the employment numbers we've been having. Yes, I understand that various tech companies are laying folks off, not just Twitter. I understand that there's a lot of job pressure on what I'll call technology space workers. But I don't think you're seeing that in the industrial space, you're certainly not seeing that in the energy patch. Don't think you're seeing that and a lot of the day-to-day 9:00-5:00s out there. I still think the employment picture looks pretty good and recessions generally have to weigh heavy on job numbers in order to actually gain traction. I hope I'm sounding a note of cautious optimism across various places. Again, individual stock prices can go many different ways. But I think in aggregate, I think in for it pretty good.
Chris Hill: Let's talk about an individual stock price moving in different ways because shares of Bumble were down 15 percent before the market opened, because Bumble's third-quarter revenue was lower than expected. Their guidance for the current quarter was lowered, and yet the stock is in positive territory. I'm assuming that's due to the CPI, but this is one of those businesses I think you and I have both watched for a while with interest because it's in an interesting space. It's the dating app for those unfamiliar. They're going up against a pretty formidable competitor in Match Group, which has such a huge market share with all of the different brands under the Match Group umbrella. After a wonderful debut, 18 months ago.
Jim Gillies: They timed that IPO spectacularly well.
Chris Hill: I was just going to say, say whatever else you want about Bumble's business, about their management, they timed about their IPO wonderfully going public in February of 2021.
Jim Gillies: They did, which is practically the peak for what I'll call sassy techie growthy names. February 2021 was the absolute peak. Then you can go track all those types of companies and see what they've done. Probably the broader market's been down for about a year since about November of 2021. But really the software things peaked at that time and there was Bumble IPOing in right in the middle of it. I think Bumble offers a lot of really interesting lessons. But always remember an IPO, you are buying something that the people who know it best in the world are selling. That's any IPO.
Now, is it a move to cash out for a founder? Is it a move where the founders are raising capital, take the business to the next level? Those are both perfectly valid reasons to IPO, but you should always have a little bit of skepticism when it comes to IPOs. I have a rule that I try to avoid IPOs for at least a year. I want to see how they're going to behave publicly. I want to see if the projections they put in their roadshow presentations actually pan out. I've got a few names I could post up for you where one of my favorites is a long-running retailer in Canada. That when it was under private equity, it was running at about three to five percent revenue growth. But then magically on their road show to IPO, to rebut.
Magically, they were going to do 14, 16 percent annualized revenue growth going forward after the IPO. I'm like, no, it isn't. Funnily enough, they haven't and the stock's down 90 percent of its IPO because that was a type of IPO where it was private equity getting out. That wasn't Bumble. Bumble is, I don't know the full details, but what I understand, the founder of Bumble came out of Match Group, the much larger competitor. Bumble is a different style service. It basically puts the control of contact and messaging in the hands of women rather than men as a man who met his significant other on one of the Match Group websites many years ago. I feel that's a good idea, but I'm not in the market for Bumble right now anyway. Sorry, my dog is dropping things in here.
Chris Hill: I thought your dog was just laughing.
Jim Gillies: No. She's really dropped a bone on the hardwood floor. Thanks dog. But no, the lessons, I think you can take it because I actually think Bumble has a good brand. I think Bumble has an interesting niche. I think it's a nice that Match can probably replicate without too much effort. They already haven't, but I think it's something that certainly if you've heard some of the horror stories in certain online dating scenarios. I happen to think this is a good idea and their innovation is a good idea, but the lesson I would suggest is because you like a business, it doesn't necessarily mean you should like the stock. The story of Bumble is they IPO in February 2021, the IPO price is set at $43 which was actually higher than the price they originally wanted and even that wasn't enough.
The stock went stupid on day one close to $75, I'm not sure it's ever closed that high again and here's why I say take a year. A year after the IPO, Bumble is down 63 percent and it's fallen another but a quarter since then, but at least he was spared that first sickening plunge and another reason why you want to let, if you want to play lottery ticket games on day 1 and try to buy and sell, fine but that's not investing, that's playing games. But you know what? That money spend is the same as money earned from the most well-thought-out investment in Berkshire Hathaway. But valuation as well as something that want to show here. So valuation matters. I'm not one of the cool kids when I say that. I know we periodically go through periods of the market where you could pay anything you want.
Think of the Nifty 50 in the '70s. Think of the Tech Bubble in the late '90s, early to 2000s think of frankly, the SaaS names in 2020-21 valuation just gets forgotten and usually if you try to challenge people with that, well, I'm a long-term investor and thinker. It's like, I don't know man and tell him are still down 22 years later from the Tech Bumble. I don't know how long term you are, but that's pretty long term. So from a valuation perspective, Bumble at its IPO was valued at over 15 times revenue, 82 times EBITDA, 266 times price to earnings and all I would say is do you have any idea what the growth numbers Bumble has to put up in order to justify that level of valuation high, by the way?
They've done fine actually but as of today, Bumble is down over 72 percent from its IPO price and today's valuation is instead of 15 times sales, it's about 4.5 times sales, so that multiples compressed by 71 percent. Instead of 82 times EBITDA, it's now being valued at about just shy of 16. That's an 81 percent compression and the PE is gone from 266 down to 13, from 95 percent multiple compression. Now, I don't know what happens from here for Bumble, but I guarantee you that scale of multiple compression will not repeat. Or reorder if you'd like to make the argument why Bumble will trade at less than one times earnings, please, by all means.
So the multiple compression has happened. I can't help you if you bought at the IPO, but looking at it today, the valuation looks much more reasonable. This is a business that has grown. I think it's 16, 17 percent in the last year, about 19 percent the last two years of top-line growth, that is. EBITDA and earnings. EBITDA is roughly followed but it's real niche producing real cash flows, growing cash flows and you can now look at it. What's the cash flow-based valuation look like? Like I said, good niche within the female-centric, female-driven customer model like that. There's too much software company or a tech company, too much stock-based compensation. That happens pretty much everywhere.
Chris Hill: I'm just going to say that's table stakes, isn't it?
Jim Gillies: It is, yeah, but doesn't mean you have to pay for it. But you'd have to, you have to build it into your models. The returns on capital haven't been terribly great, so they might be overcapitalized. They're still very much a second place to the much larger Match Group and in fact, I would think they'd probably a good exit might be a buyout by Match Group. But like I said, Bumble did come out of or the founder of Bumble, she was at Match, I believe with Tinder and I don't know the story. I've heard rumors, but I think there's some bad blood there. I'm not sure that Bumble would willingly be acquired by Match and I believe the founders slash CEO, Bumble, has voting control such that she could just veto any overtures, hostile, friendly, whatever.
There's there's not an obvious near-term exit if they wanted to sell the business to the largest logical acquirer but maybe private equity comes out them. But I like looking at IPOs, what are called busted IPOs, a year, two years after they come out, when all of the excitement has just been washed away. People go and you can say, is this a real business? I obviously think it's a real business. Is it a real business at a reasonable price? It's certainly a much more reasonable price than it was and so I thought, on a day when everyone's chasing pretty much everything and again, this was down in the pre-market as you said. This was the one that I gravitated toward going. This could be an interesting story, and something probably worth digging into more. Now it's before the CPI print made us buy everything in sight, but no, I thought this was interesting.
Chris Hill: Jim Gillies, great talking to you. Thanks for being here.
Jim Gillies: Thank you, Chris.
Chris Hill: GitLab, revenue year-over-year is up 74 percent. But like many other high-growth tech companies, its stock has taken a hit in 2022. Motley Fool contributor Jeremy Bowman caught up with GitLab CFO, Brian Robins, to talk about how GitLab helps other companies develop software and the trade-off between growth and profitability.
Jeremy Bowman: Maybe we can just start there. What is DevOps, and maybe explain it to us like we've never heard that term before.
Brian Robins: Yeah, absolutely. It's easily explained with an analogy, so let me start with analogy. Before the iPhone and I would travel, I would literally pack a walkman so I could go run in the park. I'd pack a camera so I could take pictures and my Garmin GPS in case my MapQuest that I printed out, didn't work and would literally take a duffel bag of electronics. Then came the iPhone. It was a single application that brought all that together for a terrific user experience. GitLab is a leading DevSecOps platform and we basically bring all that together for developers to create software and so it's a single application. It's the most comprehensive platform that allows your developers, the security, individuals and operations people all to work at once to create software. So we produce software better, faster, cheaper, and more securer.
Jeremy Bowman: It sounds like GitLab or your DevOps platform is replacing a lot of individual solutions. Is that fair to say?
Brian Robins: A hundred percent correct. When you deploy GitLab because it's an end-to-end platform you can replace a lot of point solutions. That's why actually did a report on the company. The payback for three years was a 407 percent return. The number 1 thing that companies can do is reduce point solutions. Number 2 is they don't actually need those teams to actually orchestrate all those point solutions and maintain those. Third, the developers are way more efficient because they can produce software a lot faster. Fourth, to the extent that the application's revenue producing. You actually get that app out in the market quicker and so you get revenue faster.
Jeremy Bowman: You guys have been a pretty fast-growing company. I believe that your revenue grew 74 percent in your most recent quarter. What do you see as your growth opportunities going forward and what's the driven growth for the company historically?
Brian Robins: Great question, Hill. Every company has become a software company regardless of geography or vertical. Since we enable companies make that software, like I said, better, faster, cheaper, more secure, a lot of companies have used us. We have approximately 60 percent of the Fortune 100 year, around 25 percent of the Global 2000. People are using the platform to create their software to get out to market quicker. The interesting stat is the company's about 10 years old, a little over 10 years. We started selling the software about seven years ago. Cohorts from seven years ago are still expanding with us today. Cohorts from six years ago are still expanding. We're barely penetrated in its really large market. We believe that the total addressable market for our products is about $40 billion. This year at the midpoint of guidance we'll do a little over 400 million. We're barely penetrated and really large market. Every company should use our product to create their software.
Jeremy Bowman: Right. Something I learned to about GitLab that sounded interesting, a lot of software companies are focused maybe only on the enterprise level, the largest companies out there, but it sounds like anybody, even one person can sign up for GitLab and then start there.
Brian Robins: Absolutely. We have a free product and we have about 30 million registered users. There's a number of people either educational and not-for-profit, individuals who use it just to do their own coding. But when you sign up for the pay product, whether you're a shop with five engineers or 5,000 engineers, it's the exact same product and so we don't customize it for any of our customers. Everybody gets to use the GitLab platform to make software.
Jeremy Bowman: I imagine that makes it easy for companies to scale up with it as well.
Brian Robins: Absolutely.
Jeremy Bowman: Any company, especially in the public markets faces competition so how do you see the competitive landscape for GitLab? Who would you say are your top competitors and how do you think about your competitive advantage?
Brian Robins: It's funny. The main competition for us is the point solutions that we've talked about. We call that DIY DevOps, do-it-yourself DevOps. Basically what companies are doing is they're buying point solutions in every stage of the software development life cycle and then pulling those together with bubblegum and bail wire to basically create a platform-like experience. For the last several quarters that the numbers have been really consistent, so in about 50 percent of the deals that we're in we don't see any competition. From unnamed competitor standpoint the largest named competitor we only seen about 20 percent of the deals. Our win rate is almost identical whether they're in the deals or not in the deals. Like I said, it's a really enormous market, about a $40 billion TAM. We're just getting started and it's super exciting.
Jeremy Bowman: When you say 50 percent of the deals you're competing for you're not seeing direct competition, you're facing off against those points solutions?
Brian Robins: They're making software today but it's unknown to us that anybody's in the deal because they're talking to us and it's not like there's a competitive RFP out there. When you go through all the salesforce notes and about 50 percent of the deals there's no known competition there. They currently have probably the DIY, Do It Yourself, DevOps, or it's a bunch of point solutions that they've put together.
Jeremy Bowman: What feedback do you get from those companies then, if they're only used to working with point solutions?
Brian Robins: It's an evaluation. We try to remove the friction out of the sales process on both the buy and sell side. Whether you buy our self-managed product or a SaaS product, we charge absolutely the same. We only have one price for premium and one price or ultimate and then we have our free tier. We only have two prices. When you're consuming the product we want to try to take all the friction out to make it easy. When we're selling the product we're doing the same thing as well. We are trying to compensate our sales team on selling ultimate versus premium or selling SaaS or as a self-managed. We go into a customer and first identify what their problems are. Then the biggest thing that we want to really do is get time-to-value and drive business outcomes. If we do that, and we know this from historical practice, those customers will continue to expand with us and be with us for a long period of time.
Jeremy Bowman: As far as, and for especially in the software sector these days and valuations have come down and I think there's debate in the market going on between growth and profitability in which is more important or what's the proper way to balance it, I'm curious that GitLab, how do you think about profitability or what do you see as maybe the proper balance of investing in growth but also showing investors profit potential?
Brian Robins: Yeah, absolutely. GitLab have been here. I just had my two-year anniversary and I get asked this question periodically and so I was thinking about the best way to answer to convey the message to the investors. Since I've been in GitLab there's really been three discrete phases that I can identify at the company. Right when I joined, we are doing this, we launched a secondary on Nasdaq Private Market and sold roughly about $200 million for the stock for team members. We had a couple of million dollars of cash on the balance sheet. That was way oversubscribed. We could've taken some primary but we didn't.
That was phase 1. Phase 2 was going public and so we went public. We just had our one year anniversary of being a public company. It was about a year ago and we had roughly a billion dollars cash on the balance sheet. October last year revenue multiple was really high and people are saying revenue, revenue, revenue grow at any cost. Then phase 3 is today's market. Revenue multiples have come down. All companies are saying cash flow breakeven, cash-flow breakeven, cash flow breakeven. Throughout those three discrete phases the messaging that said and I have delivered to investors has not changed one percent.
We said the number 1 thing we want to do at the company is grow, but we'll do that responsibly. Every quarter since we've been a public company we've increased the operating leverage in the business and have delivered improving unit economics while still growing at really high growth rates. I'm really happy to say in the two year period the messaging has been completely sent to the same. The market has really turn but we have not operated differently with almost a billion dollars in our balance sheet or $200 million on our balance sheet. We have a long-term operating plan that we continue to drive toward and really happy with the performance that we delivered last quarter and what we continue to deliver.
Jeremy Bowman: That sounds like your unit economics have steadily improved over at least in your public history. Is that correct?
Brian Robins: Absolutely, 100 percent. Just last quarter that we reported second-quarter. Second-quarter last year we did roughly 58 million in revenue. We did 101 million in revenue this past second quarter so we added $43 million of incremental revenue and did that at the same absolute dollar loss, was drove about a 1,500 basis point improvement in operating margin and so super happy even in these markets to deliver those results. But that's the key in what GitLab does. It's a mission-critical software package that helps any company create software. We're really fortunate to be where we're at. As I talked about one of the reasons why I joined GitLab was because of tailwinds. We're wearing a industry now where, as I said earlier, every company has been software company and so we're very well-positioned.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
