GitLab (GTLB -0.66%), an alternative to Microsoft-owned GitHub, has had a rough time as a publicly traded company. The DevSecOps platform provider, used by developers and companies to develop and maintain software, has seen its stock shrivel over the past year and a half.
A bruising fourth-quarter report on Monday added fuel to the fire, sending the stock down a double-digit percentage on Tuesday. As of late morning Tuesday, GitLab stock is down a whopping 75% from its all-time high.
Growth is cooling
GitLab produced impressive growth in fiscal 2022, which ended on Jan. 31 last year. Revenue soared 66% from the previous year, the dollar-based net retention rate topped 150% at the end of the year, and big-spending customers were flocking to the platform.
Fiscal 2023, which ended a bit more than a month ago, was nearly as impressive. Revenue jumped 68%, the dollar-based net retention rate remained strong at 133% to end the year, and the number of big-spending customers on the platform continued to grow quickly, albeit at a slower pace than the previous year.
There was little reason to be concerned about GitLab's results, but the company's guidance was another matter. GitLab is calling for fiscal 2024 revenue between $529 million and $533 million, which represents year-over-year growth of just 25% at the midpoint. That's still a solid growth rate, but it must be viewed in the right context.
A lofty valuation
GitLab is not a profitable company. On a GAAP basis, the company posted a net loss of $172 million in fiscal 2023. Non-GAAP net income was also squarely negative, coming in at a loss of $67.7 million. Free cash flow has yet to turn positive, with a loss of about $83 million in fiscal 2023. GitLab has plenty of cash to absorb many years of cash burn, so that's not an immediate concern.
What is a concern, at least for investors, is the toxic combination of rapidly slowing growth, chronic losses on every basis, and a sky-high valuation. GitLab is valued at about $5 billion, putting the price-to-sales ratio based on the company's guidance just below 10.
If it were 2021, that kind of valuation would have seemed like a steal. It wasn't uncommon during the pandemic-era boom in profitless tech stocks for P/S ratios to reach far into the double-digits. But that period of irrational exuberance is over.
It's now common for money-losing tech stocks to trade for just a handful times annual sales. Twilio stock goes for less than 3 times sales. DocuSign stock sells for just over 4 times sales. Zoom stock changes hands for less than 5 times sales. The list goes on.
Price increases aren't helping
A too-high valuation alone is reason enough to be cautious about investing in GitLab stock. Another reason is that growth is slowing dramatically even after the company raised prices. Effective April 3, the cost of GitLab Premium will go from $19 per user per month to $29. Existing customers will get a break, paying $24 per user per month.
GitLab's bigger customers are probably using GitLab Ultimate, which is much pricier and not subject to any price changes. But still, it's somewhat concerning that such a large price increase on the core offering won't prevent a big slowdown in revenue growth. This could mean that GitLab is expecting a vast reduction in how many new paying customers it wins this year.
Given the weak guidance, no real progress toward achieving profitability, the disappointing impact of the price increase, and a valuation that has no place in 2023, GitLab looks like a stock to avoid.
