GitLab Q2 Gains: Staggering Results, Justified Price Tag (NASDAQ: GTLB)

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Investment thesis

Git Lab (NASDAQ: GTLB) is a leading DevOps platform with one of the broadest offerings on the market, taking a fundamentally new approach through its unified data model. Typically, these types of companies operate in a specific DevOps niche, which means that their customers have to use multiple tools from multiple DevOps solution providers in their enterprise, which is not ideal. It’s perhaps no surprise then that, according to GitLab Investor presentation Q2’2360% of organizations will have moved from multipoint solutions to value stream delivery platforms to streamline application delivery by 2024 – and that’s where GitLab excels.

Gitlab offers a complete platform

Presentation to investors of GitLab Q2’23

This company ticks many of the boxes I look for in my investments: high switching costs (net dollar retention rate >130%), rapid growth, great culture, founder-CEO with skin-in-the-game (15% ownership), attractive margin profile and great opportunity ($40 billion TAM).

Despite the positives for this high-flying company, its IPO in October 2021 wasn’t exactly a slam dunk. While the company itself may have continued to perform well, stocks certainly haven’t and are currently down 60% from their 52-week highs.

Given the challenging macro landscape, investors were expecting these Q2’23 results to provide good news, with hopes that GitLab’s resilience and importance would show in the numbers.

GitLab Q2 Revenue Overview

Starting from the top, revenue grew 74% year-over-year to $101.0 million in the quarter. This beat management’s forecast of $93.5-94.5 million while comfortably beating analyst expectations of $94.4 million.

Gitlab beat Q2 revenue estimates and guidance was ahead of expectations

Investing.com/GitLab/Excel

The outlook was equally strong, with management’s forecast for the third quarter of $105-106 million beating analysts’ expectations of $103.5 million – and, if history is any indication, I I would expect GitLab to comfortably exceed those predictions.

The revenue story is getting even better when it comes to the full-year outlook, as GitLab boosted it to $411-414 million, which once again beat analyst estimates of $401 million. of dollars.

Gitlab has raised its full-year 2023 revenue forecast

Consensus Gurus / GitLab / Excel

Perhaps most impressive is the fact that, from Q4’22 to Q2’23, GitLab raised its full-year outlook from ~$388 million to ~$413 million, which is an increase of 6 % in just six months. Given the extremely challenging macroeconomic environment, only the best and most essential companies have been able to continually scale advice like this, which speaks volumes about the strength of GitLab.

Another pleasant surprise for investors came from the results of GitLab. The company is not profitable yet, but management is monitoring and providing guidance on adjusted EPS – and I’m glad they are, given what they achieved in the second quarter. The company generated Adjusted EPS of ($0.15), which was well above management’s forecast of ($0.24)-$(0.23) and also exceeded analysts’ estimates of ($0.23). $23).

Gitlab beat second quarter revenue

Investing.com/GitLab/Excel

Management then announced adjusted EPS of ($0.16) to ($0.15) in the third quarter, demonstrating continued improvement in profitability while beating analysts’ expectations of ($0.25).

Given all of this, investors won’t be surprised to learn that management raised its full-year EPS guidance to ($0.67)-($0.64), significantly beating analysts’ estimates. of ($0.90). Of particular note, the FY23 EPS outlook given in Q4’22 was ($1.00), so this estimate has improved significantly over the year to date. .

Gitlab raises its eps forecast for the year 2023

Consensus Gurus / GitLab / Excel

There haven’t been too many companies with beats across the board this earnings season, so GitLab joins a pretty exclusive club – and it’s certainly well deserved. The ability to increase revenue by more than 70% in the current environment is to be applauded, and the market rewarded shareholders with a 14% increase following the announcement of these excellent results.

GitLab Q2 Earnings Call Highlights

GitLab’s earnings call was all smiles, which is no surprise; there were a lot of positives to talk about, but I’ll start with this humble boast from co-founder and CEO Sid Sijbrandij:

What GitLab offers is faster cycle time, faster execution of cost reduction initiatives, the ability to accelerate revenue. To quantify these benefits based on a study conducted by Forrester Consulting and commissioned by GitLab, our clients have seen a 407% return on investment within three years of deploying our DevOps platform.

If you were wondering how GitLab is able to achieve such impressive results, this statement alone should provide plenty of answers. If a company is able to use GitLab and see an ROI of over 400%, that seems like a real no-brainer. It should also give investors who don’t have specific DevOps technical knowledge or experience (myself included) greater confidence that GitLab provides a high-quality product to go along with its high-quality numbers.

GitLab Delivers 407% ROI for Customers

Presentation to investors of GitLab Q2’23

Another impressive nugget from the call came from CFO Brian Robins:

We price our platform in US dollars. We therefore have no foreign exchange impact. These attributes contribute to the results we see. To illustrate this, the customer cohorts of seven years ago are still expanding today.

Despite the volatility of the macroeconomic environment in the second quarter, we saw no impact on our business. Customers are increasingly recognizing the need to address the multi-year challenges of digital transformation. The current environment is not slowing down customer decisions or lengthening our sales cycles. Buying cycles have actually accelerated across the business and we continue to see high win rates.

While there are plenty of companies that blame the macroeconomic environment for their woes, the really big companies have been able to roll with the punches and continue to succeed regardless. That’s exactly what GitLab has done, despite the strengthening US dollar and macroeconomic uncertainty, and it should give investors even more confidence in the company when times improve.

Valuation of GTLB shares

As with all high-growth disruptive companies, valuation is difficult. I think my approach will give me an idea of ​​whether or not GitLab is overvalued or undervalued, but valuation is the last thing I look at – the quality of the company itself is far more important in the long run.

Gitlab stock price valuation model

Git Lab / Excel

It’s a company that’s particularly difficult to value with my model: it has incredible growth potential that’s hard to predict over the next 5 years, it’s not profitable, and it has a very negative free cash flow margin. While I’m not surprised to see the FCF margin improve significantly over the next two years, I can’t assume that in my base case.

In my base case, my assumption is that growth slows for GitLab but remains strong, and the company achieves a CAGR of 46% in revenue through FY27. was improving as the company grew, eventually reaching 10% in FY27 – but I believe GitLab is capable of achieving FCF margins in the 20-40% range when fully optimized (based on software peers), so there are plenty of opportunities for revenue growth and margin expansion from 2027. Given this, I used a relatively high EV/FCF final multiple which I believe represents this future opportunity; in truth, the alleged multiple could be even higher.

My bullish scenario assumes that revenues can grow even faster, at a CAGR of 55%, and that FCF margins eventually reach 13% by 2027 – which, again, may even be too conservative, but it is very unknown at this point. The bearish scenario essentially assumes that growth is unsustainable, and as such everything is much less impressive.

Put it all together, and I can see GitLab stocks reaching a CAGR through 2027 of (15%), 5%, and 22% in my respective bearish, base, and bullish scenarios.

Conclusion

GitLab is one of those companies that is priced for perfection, but seems to be able to consistently deliver that perfection. Other companies in this vein include The Trade Desk (TTD), CrowdStrike (CRWD) and even Tesla (TSLA). All are companies that have delivered incredible results, and all are companies whose stock prices have appeared overvalued pretty much consistently over the past 5 years.

If GitLab continues to run with the same level of success, I could see its results being much closer to my bullish case scenario. There’s plenty to be impressed about when it comes to GitLab, and while it’s not yet a company I personally own, this quarter has certainly piqued my interest even more.

Given all of this, I’d say GitLab is a semi-cautious “buy”, and definitely a stronger buy if the stock price drops significantly from here. It’s a high-quality business that works flawlessly, and it’s a business I see myself building a position in over the next few months.

Richard L. Militello