Shares of software development, security, and operations (DevSecOps) company GitLab (GTLB -2.76%) just tanked over 30% following its latest earnings report. Meanwhile, the Nasdaq Composite index has rallied over 8% so far in 2023, showing signs that maybe, just maybe, a new bull market is coming. GitLab stock seems to have missed the memo.
The problem had less to do with the last quarter's financials and more to do with a not-so-good outlook. GitLab's rapid expansion is beginning to slow, and it's still far from profitable. It's a combination that has plagued many tech stocks in the past year, and a problem that this company can't quite seem to shake. Let's dive in.
It's all about guidance
GitLab saw revenue increase 68% to $424 million during its fiscal 2023 (covering the 12 months ended January 2023) -- and that included a 58% year-over-year increase in Q4. Clearly, the company's platform approach to DevSecOps (including a repository for software code, collaborative tools for building software, analytics and compliance, etc.) is still winning over new customers and and a greater share of projects. (Microsoft's GitHub is a key competitor in the software space for DevSecOps.)
Nevertheless, as fast as GitLab is winning adoption, there are flaws with the business. Its net loss was $38.7 million in Q4, an improvement from the net loss of $45.8 million in the same quarter last year. But the company is also losing money on a non-GAAP (adjusted) basis. Adjusted net loss was $4.5 million in Q4, though that was a big improvement from the loss of $23.2 million last year.
Free cash flow was a negative $83.5 million over the last year, although GitLab's substantial cash and short-term investment hoard of $936 million (and no debt) still keeps it on very solid footing.
The problem, though, was guidance for the next fiscal year that will end in January 2024. GitLab is getting hit by the same economic slowdown that other tech companies face. Revenue is expected to grow "only" 25% this next year, a significant cooling off from the 68% annual growth rate just reported. In addition, adjusted operating losses are expected to tally to as much as $64 million.
The company is shelling out significant operating expenses (marketing, development, admin) and has yet to reach a sustainable scale. And as was the case in fiscal 2023, employee stock-based compensation will also likely continue to be a drag. Stock-based comp was $123 million last year, quadruple the amount in the prior year.
New stock issued to employees lowers revenue growth for existing shareholders on a per-share basis -- not exactly a good thing with overall revenue expansion expected to slow significantly in the year ahead.
Is the stock a buy yet?
After the post-quarterly-update drubbing, GitLab stock is plumbing all-time lows since it launched as a public concern (the initial public offering was in late 2021). Given the lack of profitability and dilution from stock-based comp, I'm not sure the market will treat GitLab with all that much favor for the time being.
Still, GitLab's enterprise value (or EV, a way to stick a value on a business using market cap minus net cash) is now just $4.25 billion. With revenue expected to total $531 million in the next year, the shares trade for an EV-to-expected-sales multiple of about 8. It isn't cheap, but if the company can sustain its double-digit percentage growth and fix some profitability issues, things might begin to turn a corner. Some sort of use for that cash ($641 million of it is invested in short-term fixed-income securities) -- like, a stock repurchase plan -- might go a long way toward changing the recent narrative.
Personally, I'm not a buyer yet. But I am keeping GitLab on my watch list. Maybe business fundamentals will be more favorable later this year if the economy stabilizes.