It's impossible to get the full picture of what's happening with any business from a quarterly earnings report. GitLab (GTLB 1.38%) is a wonderful case in point. Following a not-so-great quarterly earnings update -- and a cratering in stock price -- GitLab rallied in grandiose fashion. Two days after the update, Alphabet's (GOOGL -3.78%) (GOOG -3.89%) Google reported it was a buyer of GitLab stock. What would Google want with shares of this leader in software development, security, and operations (DevSecOps) company?
Moves, countermoves, and counters to countermoves
Quick recap of how we got here: Back in 2017, when GitLab was still a private concern, GV (formerly Google Ventures) led an investment round in GitLab totaling $20 million. Just months later, in early 2018, GitLab announced it was leaving Microsoft's (MSFT -3.09%) cloud computing platform Azure in favor of...drum roll...Google Cloud! The switch was trumpeted as providing better integration for software developers working on bringing old software into a cloud-hosted architecture, but clearly money moving hands certainly played a factor.
Just a few months later, in the summer of 2018, Microsoft said it was acquiring popular software code repository (and GitLab peer/competitor) GitHub for $7.5 billion. With the loss of GitLab as an Azure partner, Microsoft needed a way to keep filling its cloud computing funnel with new software DevSecOps projects. GitHub was a natural replacement.
Fast forward a few years, GitLab made its publicly traded debut in October 2021 with a hot IPO that topped up its coffers with $650 million in cash and that initially valued GitLab at a market cap of more than $15 billion. Of course, the ensuing bear market took a heavy toll on that valuation, but Google's early investment has nonetheless been a profitable one -- given that Google's investment in the then-private company back in 2018 valued GitLab at about $1 billion.
Google buys the dip in stock it already owns
So where are we today? GitLab stock is down in the dumps, dragged down in the last year-plus as the market has turned its microscope on bottom-line profit and less on revenue growth. GitLab's outlook for the next fiscal year (the 12-month period that will end in January 2024) indicated slowing revenue growth and still no profits. The market was mighty displeased.
But there was at least one buyer of the dip: Alphabet's GV. The Google venture capital investment arm boosted its stake in GitLab by over 500,000 shares on March 13 and 14, 2023, scooping up the stock for as little as $29.12 per share. The investment increased Alphabet's ownership in Gitlab (via the GV fund) to about 3% of the company, or nearly $70 million.
What happens next?
To be sure, Alphabet still has a small minority stake in GitLab -- although its recent regulatory filing indicates its investment is a "member of 10% group," meaning that Alphabet's GV is working with a consortium of investors that collectively have a more-than-10% stake in GitLab.
Could this mean a full takeover is imminent? Perhaps. Alphabet has made it clear that its Google Cloud segment is a top priority. Indeed, while Google Search has struggled to maintain positive momentum in the last year, Google Cloud has kept growing its sales and is homing in on operating profit breakeven. GitLab is undoubtedly a key part of that success as the fast-growing (but also unprofitable) DevSecOps company has been a great partner for Google Cloud in recent years (it was a Google Cloud Technology Partner of the Year winner in 2021). https://aout.gitlab.com/press/releases/2022-06-15-gitlab-wins-2021-google-cloud-technology-partner.HTML
And while Alphabet's ownership of GitLab is still small, a purchase of the rest of the company would be peanuts for it. Remember, Alphabet ended 2022 with nearly $114 billion in cash and short-term investments. Even if it offered a big premium to purchase GitLab, that would hardly put a dent in Alphabet's war chest.
The real goal, though, would be to keep Google Cloud's momentum going strong as it tries to play catch-up with Microsoft Azure. This ability to deploy massive amounts of cash to support its growth initiatives is a top reason I keep adding to my position in Alphabet stock.
Time will tell if Alphabet decides to make a bigger move here and add GitLab to its toolbox of software development toys. In the meantime, I like Alphabet's judicious use of cash to buy the dips in stocks of its key technology partners.