Software stocks have gotten slammed this year as a combination of inflated valuations, slowing growth, and fears of a recession have torpedoed the high-growth sector.
While some cloud stocks have seen growth significantly decelerate, the sell-off has created a buying opportunity in others. GitLab (GTLB 1.70%) looks like one of them.
The provider of a cloud-based DevOps platform just posted 69% revenue growth to $113 million in its third-quarter earnings report, beating analyst estimates at $106 million. While the company is still operating at a loss, its margins are improving, and its adjusted loss per share of $0.10 topped the consensus at $0.15.
Beyond the third-quarter numbers, there are a number of reasons why GitLab looks to have a bright future ahead.
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A wide-open growth opportunity
GitLab is penetrating an addressable market estimated to be worth $40 billion, which is nearly 100 times the size of its current run-rate revenue of $452 million, and the company faces relatively little competition.
While its closest competitor is Microsoft's GitHub, GitLab CFO Brian Robins said in an earlier interview with The Motley Fool that in half of the company's sales pitches, it doesn't face any direct competition, competing only with in-house tools. GitLab's comprehensive DevSecOps platform, which helps organizations develop, deploy, and manage their software and IT, is also an advantageous position as it's replacing individual point solutions.
The company says that 85% of organizations use two to 10 DevOps tools, and GitLab's platform can replace all of them, saving organizations time and money. Replacing point solutions has also become a trend among software buyers; Gartner estimates that by 2024, 60% of organizations will have switched from multiple-point solutions to single delivery platforms, which should support GitLab's growth.
Its DevOps platform also delivers a clear impact for customers. A GitLab-commissioned study from Forrester Research said that its platform could produce a return on investment of up to 427% three years after deployment and the company shared some customer stories that show how GitLab is making them more efficient.
Airbus said it's able to release new features 144 times faster with GitLab. Swiss bank UBS was able to replace 50 different development toolchains with GitLab's platforms and now has more than 18,000 employees using GitLab.
The company tends to grow through a land-and-expand model, starting out small by selling to just developers before expanding more broadly in an organization. Along the way, customers tend to ramp up from the Premium tier, which costs $19/month, to the Ultimate tier, which costs $99/month, and the company said the Ultimate tier is growing faster than 100%.
Is GitLab a buy?
GitLab stock has fallen sharply over the last year, but the stock still isn't cheap, currently trading at a price-to-sales ratio of 16.
Looking ahead, the company guided to revenue growth of 54% for the fourth quarter and said on the earnings call that it was soft-guiding to the analyst consensus for fiscal 2024 revenue, or next year, of $592 million, representing 41% growth. CFO Brian Robins also said the company is targeting free cash flow breakeven in fiscal 2025, showing the company is making progress toward profitability.
While the macro environment has introduced some uncertainty for GitLab, it's shown more resistance to those headwinds than many of its peers, and the breakeven FCF guidance is a sign the company is confident it can manage through the volatility.
With the stock down roughly two-thirds from its peak last year and a wide-open growth opportunity in front of it that it is quickly capturing, the risk/reward calculus looks favorable in GitLab's stock right now. Investors may want to take advantage before market sentiment shifts back toward high-growth software stocks.
