An uncertain economic environment is impacting some companies more than others. In the world of software, some vendors are facing customers reluctant to spend, while for others, it's business as usual. GitLab (GTLB -0.98%) and CrowdStrike (CRWD 2.03%) are still growing by leaps and bounds, and both companies have enormous long-term growth opportunities.
Neither stock is cheap, but for growth investors looking for the best of the best, GitLab and CrowdStrike fit the bill.
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GitLab
In the world of source-code management, Microsoft's GitHub reigns supreme. The tech giant paid $7.5 billion for GitHub back in 2018, a move that made a lot of sense given Microsoft's other developer-focused products. Microsoft's Azure cloud platform is for running applications; its Visual Studio family of software is for developing applications; and GitHub is for managing code and automating application deployment.
GitHub isn't the only player, though. Another popular option is GitLab, which aims to be a one-stop shop for developers. GitLab follows an open-source model, making its core software available for free while also offering a paid-subscription service. More than 30 million users use GitLab's platform, and almost all of them don't pay the company a dime. But the 8,175 paying customers, including 874 that shell out at least $100,000 annually, generate nearly $600 million in annual run-rate revenue.
GitLab uses a land-and-expand business model, getting developers on board and then expanding within those developers' companies. GitLab's platform can replace a wide variety of point solutions, reducing complexity for customers, and making it unlikely that those customers will want to go back to a fragmented mess of tools and software products.
This strategy is working wonders. GitLab's revenue rose 32% year over year in the third quarter, driven by a dollar-based net-retention rate of 128%. In other words, once GitLab lands a paying customer, that customer tends to increase spending on GitLab's platform over time. The company also booked its first adjusted-operating profit in Q3, although GitLab is still unprofitable on a generally accepted accounting principles (GAAP) basis.
GitLab's platform is resonating with both developers and large enterprises that are ramping up spending. While the stock isn't cheap, valued at around 16 times full-year revenue guidance, a $40 billion market opportunity gives the company a long runway for growth. A lofty valuation makes the stock risky, but investors should be impressed by the company's ability to grow so quickly in the shadow of Microsoft's GitHub.
CrowdStrike
Cybersecurity is something that companies can't afford to skimp on. The cost of dealing with a data breach, both in dollars and in reputation, can be staggering. The average monetary cost of a breach in 2023 is $4.45 million, according to IBM, and companies that fall victim may feel repercussions in terms of lost customers for years.
Securing applications, data, and networks has become more complex in the age of cloud computing. Larger enterprises tend to mix multiple public and private clouds, a setup that requires cloud-first cybersecurity tools. CrowdStrike's modular Falcon platform has emerged as one of the go-to options, enabling companies to consolidate and simplify their cybersecurity efforts.
CrowdStrike's results speak for themselves. The company grew revenue by 35% year over year in Q3, and it surpassed $3 billion in annual-recurring revenue. The plan is to more than triple that figure to $10 billion within the next five to seven years, a feasible goal given the size of CrowdStrike's market opportunity. The company expects its total addressable market to reach $100 billion by 2024 and $225 billion by 2028.
In addition to winning over new customers, CrowdStrike can grow by selling existing customers additional modules. As the company expands its platform to cover new areas, including AI-powered tools, asset visibility and management, and identity security, it creates more ways for customers to expand spending. To get a sense of the opportunity: If all of CrowdStrike's customers were to adopt every available module, it would generate an additional $19.6 billion of annual revenue.
About 63% of customers pay for at least 5 modules, a percentage that has grown from just 2% in 2018. This strong internal growth has pushed up adjusted profits and free cash flow, and CrowdStrike is now targeting positive and sustained pre-tax profit on a GAAP basis starting in fiscal 2024.
Like GitLab, CrowdStrike is an expensive stock. Valued at $57 billion, shares trade for around 19 times annual revenue based on analyst expectations for fiscal 2024. But with cybersecurity spending unlikely to stop growing in the years ahead as companies grapple with escalating threats, CrowdStrike is well positioned to grow at an impressive rate for a very long time.
